Government securities finally saw a little excitement last Friday on news of a lower-than-expected increase in nonfarm jobs, but by the end of trading, prices had dropped below previous levels and traders took a holiday.

Now with the Labor Day weekend behind them, traders are looking to possible inflationary cues from this Friday's producer price index.

"People are selling into the producer price index," said James Kenney, head of the trading desk at Prudential Securities Inc. Kenney cited a high prices-paid number from last week's Chicago purchasing managers index, adding that most metals nave done better and oil is firm. All these signs of economic strength point to selling in the bond market, he said.

Today's auto sales figure for August may also make inflation look higher. According to William Cohen, a financial market economist with Lehman Brothers, car buyers paying the full sticker price on 1994 models may skew seasonal adjustments usually made this time of year.

"We continue to believe that the pace of economic growth is slowing, and with it inflationary pressure, factors that would normally point to a bond market rally," Cohen said in a weekly update from Lehman. "But the seasonal adjustment factor related to motor vehicle prices may help make it appear that inflation is accelerating ."

The Jewish holiday of Rosh Hashanah may also slow the market today.

The market rallied Friday morning when the Labor Department reported that August nonfarm payroll jobs grew at a smaller-than- expected rate of 179,000. Economists had expected a number anywhere from 200,000 to 300,000. Nonfarm employment for July was 259,000.

Trading immediately jumped as a result of the payroll number, with the benchmark 30-year Treasury bond climbing almost a full point to yield 7.38%, down from 7.44% on Thursday.

But by midmorning, the long bond was down off its highs, plummeting around 11/2 points to a net loss of 15/32 from the opening. The 30-year ended Friday's abbreviated session down a half, to yield 7.48%.

Early in the morning, Prudential's Kenney saw trades on short-covering and said traders carried the market higher off the payroll number, which was "certainly weaker than expected." He also saw better selling in retail accounts.

"It's been pretty wild, extremely choppy with substantial selling at higher levels," Kenney said. "If you looked across the numbers, it was a mixed bag in there."

The day's twists and turns continued when a strong piece of inflationary news came in at midmorning. Columbia University's inflation index rose to 111.4 in August, its highest level in five years, which threw the 30-year bond into its tailspin.

A long bond trader said "the market is for sale across the board" when the Columbia report was released, with constant selling on the long side. The earlier payroll number reflected only a seasonal adjustment, he said, so the market corrected itself.

Kevin Flanagan, a vice president and financial economist at Dean Witter Reynolds Inc., said on Friday that the yield curve steepened. "What you're seeing is the front end is relatively stable whereas the longer end is lower" from the Columbia report, a rise in manufacturing jobs, a weak dollar, and the Labor Day holiday.

Allen Sinai, chief economist for Lehman Brothers, said that Friday indicators showed that the economy is slowing down, but inflation is picking up.

The Columbia report "hurt the bond market, which is inflation-sensitive," but at the same time, "the short end was stronger off the employment report, which was very soft," Sinai said.

The August jobless rate remained at 6.1%, unchanged from July. But the pace of job creation slowed, the Labor Department said, showing that economic growth is slowing to a more moderate pace.

Despite the up-and-down nature of current market movements, Sinai said, activity remains in a trading range. The running rate on inflation is 2.5% annually, "the lowest in 30-some odd years," he said, but market players remain wary.

"The question for the market is whether a slowdown in growth will cut through the prospect of an inflation pickup," Sinai said. "We don't know that now, so the markets will do what they do, which is up, down, or sideways on any given day, which means volatile markets."

The currency market opened Friday with the dollar at 99.80 against the Japanese yen and at 1.5770 against the German mark. By midday, the dollar was trading at 99.15 yen and 1.5565 German marks.

Flanagan said the dollar is losing ground in its relationship to European currencies, while it can't fall too much further against the yen because the Japanese central bank has a floor on the dollar.

"Problems of weakness in the dollar have not gone away," Flanagan said. "The dollar and the long bond have moved in lockstep in the past few months, despite the Federal Reserve tightening."

The 10-year note was down 6/32 to yield 7.19%. The seven-year was down 3/32 to yield 6.98% and the five-year was down 3/32 to yield 6.80%.

The yield on the three-month bill was up one basis point to 4.65%. The yield on the six-month bill was up four basis points to 5.00% and the yield on the one-year was up one basis point to 5.51%.

The September Treasury bond futures contract closed down 15/32 to 103 4/32.

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