Municipal prices rallied Friday after dismal jobs data prompted a Fed ease, clearing the way for prices to move even higher because of increased demand and thin supply.

The Labor Department reported that nonfarm payrolls fell 117,000 in June, while the unemployment rate for the month rose 0.3% to 7.8%.

The department also reported that the average weekly workweek fell 0.3 hours to 34.3 hours, a further reflection of weakness, while overtime hours fell 0.1 hours to 3.9 hours.

The Federal Reserve responded almost immediately to the reports by slashing the discount rate 50 basis points to 3% from 3 1/2%. By mid session the weak economic data prompted the Fed to intervene again and cut the funds rate 50 basis points to 3 1/4%.

"You can't underestimate the weakness of these numbers," said Jeremy Gluck, economist at Mitsubishi Bank. "A fall of this kind affects every other sector of the economy. Production, orders for durable goods, and personal income are all hurt by this."

Tax-exempt trading was heavy, despite the shortened holidays session, and prices were quoted up 1/2 to one point higher by early afternoon. Short-term note yields were quoted 10 to 15 basis points lower on average.

In the debt futures market, the September municipal contract settled up 1 3/32, 97.12. The September MOB spread widened to negative 166 as Treasury prices outpaced municipals.

After months of range trading between 7.75% and 7.92%, the 30-year Treasury bond established a new range Thursday, estimated by traders to be between 7.50% and 7.77%.

Market players, scarce Thursday ue to the holiday weekend, can look forward to increased demand and shrinking supply painting a rosy picture for near-term price prospects.

"With all the money coming into the market after all those bonds were called, and renewed concern about the country's economy, municipal prices may be headed into uncharted territory," one trader said.

"I started trading munis in 1977, and I don't think I've ever seen a combination of more money interested in bonds and a weaker outlook for the economy at the same time," said another trader.

The Bond Buyer calculated 30-day visible supply at $2.8 billion Thursday, while The Blue List, sometimes used as an approximate indicator of dealer inventory, fell $10 million to $1.15 billion.

Approximately $2.6 billion of tax-exempt securities are expected to be priced this week, according to preliminary figures compiled Thursday.

Dominating supply is $380 million of Iowa tax and revenue anticipation notes, to be priced by Goldman, Sachs & Co, in the short-term sector.

The competitive sector features $279 million of Georgia general obligation bonds, $242 million of Minnesota refunding bonds, and $120 million of Tennessee GOs.

The negotiated calendar features few sizable deals this week, Bear, Stearns & Co. will price the two largest ones, $136 million of Sacramento Municipal Utility District, Calif., electric revenue refunding bonds and $133 million of New York State Medical Care Facility Authority hospital and nursing mortgage revenue bonds. Goldman Sachs and Lehman Brothers will price $125 million of Oregon Tri-County Metropolitan Transportation District general obligations.

Thursday's Market

Traders said numerous blocks of bonds changed hands, including a total of $25 million of Houston general obligation 6 1/4 of 2012, which were said to have traded at 99 1/2 to yield 6.29%, and $8 million of insured Roanoke, Va., water and sewer 6 1/2s of 2021, which were said to have traded around 6.30%.

Despite downgrade warnings by Moody's Investors Service, California bonds improved on the day. Market sources said early Thursday that bonds changed hands around 6.25% net.

In follow-up business, Goldman Sachs freed $355 million of Metropolitan Transportation Authority commuter facilities revenue bonds from syndicate restrictions.

In late secondary trading, the maximum-term bonds, Municipal Bond Investors Assurance Corp. insured 6 1/4s of 2017, were quoted trading at 99-100 to yield approximately 6.33% on the bid side. They were originally priced to yield 6.35%.

In other secondary dollar bond trading, prices were 1/2 to one point higher, led by insured New York paper, in the heavy trading.

Florida Turnpike Authority 6.30s of 2012, insured by Financial Guaranty Insurance Co., were quoted at 100 1/2-7/8 to yield 6.28% on the bid side. New Jersey Highway Authority 6 1/4s of 2014 were quoted at 99 7/8-100 to yield 6.26%, and New York City Water Authority AMBAC 6.20s of 2021 were quoted at 99 1/8-3/8 to yield 6.26%. South Carolina Public Service Authority 6 3/8s of 2021 were quoted at 100 1/4-1/2 to yield 6.35%.

Traders of short-term securities said that action was brisk in immediate reaction to Thursday's employment reports, with yields five to 15 basis points lower. However, after some clearing of new balance inventories, traders said that activity had slowed to a crawl.

Late in the session, Los Angeles tax and revenue anticipation note 3 3/4s were quoted at 2.70% bid, 2.65% offered; San Bernadino County Calif., Trans 3 3/4s were quoted at 3.00 bid, 2.90% offered; New York City tax anticipation note 3 1/4s were quoted at 2.50% bid, 2.45% offered; and New York State Trans 3.65s were quoted at 2.75% bid, 2.70% offered.

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