The first indications of how the economy performed in July, due out at the end of this week, will set the Treasury market's tone going forward into next week's blizzard of supply.

The information on July is especially important because the statistics on June have been so varied.

"The month of May looked pretty good, but the reports for June are mixed," said Martin Mauro, a senior economist at Merrill Lynch Capital Markets. "The July reports will be crucial."

Treasury prices improved last week on a string of weaker-than-expected numbers, including June durable goods orders, the weekly jobless claims, and the second-quarter gross national output report.

Last week's soft statistics, combined with the persistently slow growth in the money supply, supported the view that the recovery will be sluggish and left open the possibility that the economy could slide back into recession.

"Right now, there's a lot of concern that the economy could be at a

Treasury Market Yields

Prev. Prev.

Friday Week Month

3-Month Bill 5.73 5.73 5.70

6-Month Bill 5.93 5.97 5.92

1-Year Bill 6.22 6.22 6.30

2-Year Note 6.84 6.82 6.89

3-Year Note 7.20 7.26 7.26

4-Year Note 7.33 7.43 7.43

5-Year Note 7.80 7.89 7.87

7-Year Note 8.04 8.13 8.10

10-Year Note 8.19 8.26 8.22

20-Year Bond 8.34 8.42 8.41

30-Year Bond 8.38 8.47 8.40

Source: Cantor, Fitzgerald/Telerate

risk of a double dip," said Lynn Reaser, a senior economist at First Interstate Bancorp of Los Angeles. "That has given rise to some speculation about another cut in the funds rate."

Treasury market participants will be considering that possibility as they watch this week's numbers, especially the July purchasing managers' report and money supply figures Thursday and the July employment report Friday, Ms. Reaser said.

She said it would take another decline in nonfarm payrolls in July to get the Federal Reserve to ease again.

In June, nonfarm payrolls fell 50,000.

"If the numbers show both total nonfarm and manufacturing payrolls declining, I think that would be a strong message to the markets that short-term rates will move down another notch," Ms. Reaser said. "If the report shows a sizeable increase and an upward revision to June's numbers, then I think the market will believe, and probably correctly, that the Fed will not ease at this point, at least not in August."

Early forecasts for July nonfarm payrolls on average showed a 70,000 increase.

Traders were bullish at the end of last week, but they acknowledged that the numbers this week, especially the jobs data, and the refunding auctions next week probably put a cap on further gains for the time being.

"Most people are optimistic, but they want to contain their optimism ahead of the refunding because they think they can get it cheaper," a government bond trader said. "The only thing that can change people's minds, that would make them not want to own supply, is if we get a lousy employment report."

The trader said a "lousy" report would show a gain of 100,000 or more in nonfarm payrolls.

Since the long-term outlook is good, any price dips on this week's indicators or on supply worries represent a good chance to buy, traders said.

"My guess from here is that market backs up a little bit ahead of [Friday's] employment report," said Ward McCarthy, a managing director at Store & McCarthy Research Associates. "If it does, it represents a good opportunity to get involved."

On the other hand, if prices continue to rally going into next week's refunding, he predicts a bout of indigestion after the auctions and suggests waiting until then to buy.

Friday's Trading

Treasury prices rallied briefly Friday morning when the second-quarter gross national product report showed a surprisingly small gain, giving the market yet another sign that the recovery will be lackluster.

But when there was no follow-through after the initial move higher, dealers decided to take profits. The wave of selling erased all the earlier gains, and by late in the afternoon, prices were narrowly mixed, with the 30-year bond off 1/8 point to yield 8.38%.

Second-quarter output rose only 0.4%, far below the consensus forecast for a 1.1% gain.

The second-quarter gain is still the first sign of growth in a while; output fell 2.8% in the first quarter and 1.6% in the fourth quarter of last year.

The second-quarter report "certainly doesn't dispel the notion that the economy is recovering in the second half," said Steve Roach, a senior economist at Morgan Stanley. "At the same time, it doesn't point to any extra vigor" in the pickup.

Consumer spending posted a strong 3.6% gain, but the overall increase in output was tempered by the 21.2% surge in imports, with oil imports constituting about half that increase.

"Consumers did purchase a lot of goods in the quarter, but a lot of those goods were produced abroad," said Sally Kleinman, a financial markets analyst at Manufacturers Hanover.

The GNP report's inflation measures were encouraging, especially the fixed-weight deflator, which dropped to 3% from the 5.2% rise in the first quarter.

The September bond future contract closed 1/32 higher at 94 17/32.

In the cash market, the 30-year 8 1/8% bond was 3/32 lower, at 97 1/32-97 5/32, to yield 8.38%.

The 8% 10-year note fell 3/32, to 98 19/32-98 23/32, to yield 8.19%.

The three-year 7% note was unchanged, at 99 13/32-99 15/32, to yield 7.20%.

In when-issued trading, the 6 7/8% two-year note was steady at 100 1/32-100 2/32 to yield 6.84%, and the five-year 7 7/8% note was unchanged at 100 7/32-100 9/32 to yield 7.80%.

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