With the fireworks apparently over for now in the foreign exchange market, the continuing weakness in the U.S. economy is coming back to the forefront of trader's thinking.
The key economic indicator this week is Friday's August employment report, and analysts say the jobs statistics are likely to confirm that the economy is still expanding very slowly.
The sluggish growth and contained price pressures should allow interest rates to move lower in the weeks ahead, traders and analysts said.
The dollar's weakness remains a concern, but late last week the U.S. unit seemed to be holding its own against the German mark.
It fell sharply against the yen on Friday, though, after the Japanese cabinet approved a 10-trillion-yen fiscal stimulus package that includes big increases in public works spending.
Late Friday, the dollar was quoted at 123 yen, down from 124.75 at 123 yen, down from 1.4080 marks, little changed from Thursday's close.
"As the week comes to a close, there is a gradual disassociation of the Treasury market from the foreign exchange market, in sharp contrast with the way the week started," said Anthony Karydakis, a senior financial economist at the First National Bank of Chicago.
Mr. Karydakis said Friday's employment report will be this week's "landmark" indicator, but he said it should be "constructive" for the market, since it will repeat the slow-growth story.
Most economists are forecasting increases of 150,000 to 200,000 in August nonfarm payrolls. But they say many of those jobs are federally funded summer jobs for teenagers. In July, nonfarm payrolls rose 198,000 but 75,000 of the new jobs were temporary summer jobs for young people.Treasury Market Yields Prev. Prev. Friday Week Month3-Month Bill 3.21 3.12 3.246-Month Bill 3.33 3.25 3.361-Year Bill 3.45 3.44 3.602-Year Note 4.15 4.06 4.383-Year Note 4.68 4.60 4.845-Year Note 5.60 5.49 5.817-Year Note 6.14 6.02 6.2510-Year Note 6.62 6.50 6.7015-Year Bond 7.01 6.91 7.0430-Year Bond 7.42 7.34 7.45Source: Cantor, Fitzgerald/Telerate
Mark Green, an economist at Wells Fargo Bank, expects August payrolls to rise 150,000, with 50,000 coming from the youth employment program.
That kind of report would be "consistent with the idea that the economy is growing, but at a very sluggish pace," Mr. Green said. "The bond market seems to have that kind of number priced in pretty completely right now."
Mr. Karydakis noted that the front end of the market seemed to be faring best. He attributed that to the market's view that the economy is still under-performing, combined with its realization that "the dollar cannot paralyze Fed policy."
"There's also the thought that proceeds of central banks' foreign exchange intervention will go into the two- and three-year sector," he said.
Treasury prices closed unchanged to 3/8 point lower Friday after trading within narrow price ranges.
Late in the day, the 30-year bond was off 3/8 point and yielded 7.42%.
"It's been a very dull session, with very little going on," a government note trader said.
Traders said the market focused on the dollar and ignored the positive implications of Friday morning's report on July personal income and spending.
The Treasury market traded higher going into the report, then began to decline after the numbers came out.
July personal income rose only 0.2% and spending was up to 0.3%. That compares to a revised 0.1% gain in income and 0.4% rise in spending in June.
"Not only do we have weak consumption, but it continues to outpace income and it can't do that forever," said David Wyss, chief financial economist at DRI/McGraw-Hill.
The September bond futures contract closed 1/32 higher at 105.
In the cash market, the 7 1/4% 30-year bond was 11/32 lower, at 97 27/32-97 31/32, to yield 7.42%.
The 6 3/8% 10-year note fell 1/8, to 98 3/32-98 7/32, to yield 6.62%.
The three-year 4 5/8% note was down 1/16, at 99 25/32-99 27/32, to yield 4.68%.
In when-issued trading, the 4 1/4% two-year note was unchanged, at 100 5/32-100 6/32, to yield 4.15%, and the five-year 5 5/8% note was up /32, at 100 1/32-100 3/32, to yield 5.60%.
The new notes settle on Monday. Both are showing a substantial profit from their auction levels; the two-years came at an average of 4.30% and the five-years at an average of 5.74%.
Rates on the three most recently issued Treasury bills were one basis point higher, with the three-month bill at 3.17%, the six-month bill at 3.26%, and the year bill one basis point higher at 3.34%.