News that the manufacturing sector of the U.S. economy continues to gain steam produced a moderate sell-off in the Treasury market yesterday, and prices ended lower across the board.
The 30-year bond ended down 3/8 of a point to yield 6.30%.
The Philadelphia Federal Reserve's Business Outlook Survey showed that the pace of growth in the manufacturing sector jumped sharply in December to its highest rates since 1983.
The report confirmed that manufacturing continues to be a powerful engine of growth in the economy and supported the view that 1993 will end on solid footing, with gross domestic product growth of 4.0% or more, analysts said.
But more important, market observers said, is what recent news on the manufacturing sector of the economy might be saying about growth next year. Many said yesterday that reports indicate no slowdown in the recent pickup in the factory sector.
"The bond market is groping with stronger economic growth and wondering what it will do to inflation," said Mickey Levy, chief economist at NationsBanc Capital Markets Inc.
The risk for Treasuries, market observers said, is that upcoming economic figures may prompt Wall Street firms to hike their already upwardly revised forecasts for growth in the fourth quarter of 1993. While the market spent most of last month pricing in a strong finish to the year, many players now fear that the economy's ongoing acceleration will carry over to next year.
"The Philly Fed survey was an impressive referendum of the strength of the manufacturing sector," said William Sullivan, director of financial markets research at Dean Witter Reynolds Inc. "There has been a good correlation between that sector and what has happened in the economy."
The Philadelphia Fed's diffusion index for the month was 42.4, up from 22.4 in November. Current indicators for both manufacturing shipments and new orders showed solid gains. Employment levels were reported unchanged this month, but the work week was longer. Most indexes of future manufacturing improved and were at their highest levels since last February.
Economists cautioned that investors should not read too much into the Philadelphia Fed's survey because it is a regional report and does not reflect manufacturing activity across the nation. Sullivan offers up what happened in the manufacturing sector last year as an example.
Manufacturing growth averaged upwards of 0.9% in the last three months of 1992, causing economists to boost their estimates for economic growth in the first quarter of 1993. In reality, growth in the sector averaged only 0.2% in the first three months of 1993.
Big picture: The outlook for overall economic growth in 1994 remains mixed. Market observers, however, point to a number of developments in the market to support their case for sustained growth next year. Money managers, they say, are reducing the duration of their portfolios to protect their holdings from a potential spike in interest rates. In addition, manufacturers are reporting increased production schedules to meet mushrooming consumer demand for durable goods.
U.S. Treasury Secretary Lloyd Bentsen gave a similar outlook yesterday. Speaking to reporters, Bentsen said the Clinton Administration is comfortable with current levels of interest rates and inflation and forecasts three percent growth in 1994.
"We are seeing a gradual, sustainable increase in growth with low inflation," Bentsen said. "Over the long term, you'll see a gradual increase in long-term interest rates. But as the situation stands right now, we're quite comfortable right now with what we see."
Treasury market players ignored other bearish economic statistics. The U.S. merchandise trade deficit narrowed 1.5% to $10.45 billion during October as a record level of imports outpaced record volume of exports, the Commerce Department said. Exports of U.S. goods climbed $1.2 billion to a record $40.1 billion, but imports increased $1.1 billion to a record $50.57 billion.
Analysts agreed that the trade data showed few, if any, surprises, and in general reflected an acceleration of economic activity both in the U.S. and and its trading partners.
Also released yesterday, new claims for state unemployment insurance benefits during the week ended December 4 fell 7,000 to a seasonally adjusted 330,000 from 337,000, the Labor Department said. The previous week's level had been originally been reported at 335,000.
Late yesterday, the New York Fed reported its weekly money supply figures. In the week ended December 6, M1 rose $4.2 billion, M2 rose $11.1 billion, and M1 was up $6.5 billion.
In futures, the March bond contract ended unchanged yesterday at 115.19.
In the cash markets, the 4 1/4% two-year note was quoted late yesterday down 1/32 at 100.02-100.03 to yield 4.19%. The 5 1/8% five-year note ended down 4/32 at 99.22-99.24 to yield 5.18%. The 53/4% 10-year note was down 4/32 at 99.15-99.19 to yield 5.80%, and the 6 1/4% 30-year bond was down 12/32 at 99.06-99. 10 to yield 6.30%.
The three-month Treasury bill was down one basis point at 3.03%. The six-month bill was down one basis point at 3.23%, and the year bill was down one basis point at 3.46%.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 3.07 3.11 3.116-Month Bill 3.30 3.32 3.321-Year Bill 3.58 3.55 3.552-Year Note 4.19 4.16 4.163-Year Note 4.53 4.46 4.465-Year Note 5.18 5.06 5.067-Year Note 5.34 5.20 5.2010-Year Note 5.80 5.63 5.6330-Year Bond 6.30 6.15 6.15 Source: Cantor, Fitzgerald/Telerate