Prices Expected to Trade in Range As Market Waits for Jobs Figures

Treasury prices may spend most of this week locked in a narrow trading range as the market waits for Friday's all-important report on May employment.

"We'll just tread water because Friday's employment report is critical for evaluating what the Fed is likely to do and where the market's likely to go," said Charles Lieberman, a managing director at Chemical Securities Inc.

Last Tuesday, prices fell sharply when traders were confronted with some stronger-than-expected economic indicators and a report that Saudi Arabia favored an increase in crude oil prices.

The market spent the rest of the week slowly retracing Tuesday's losses as traders decided they had overreacted to the oil price story.

Traders said the price improvement also showed participants were starting to think again about the possibility of another Fed easing, despite The Wall Street Journal's report on May 22 that the Federal Open Market Committee had shifted to a symmetrical directive at its most recent meeting.

Even under a symmetrical directive, Federal Reserve Chairman Alan Greenspan has the leeway to alter the funds rate by 25 basis points, analysts say.

And one of the key pieces of data the Fed will use to assess the economy is the May jobs report.

Twenty economists surveyed by The Bond Buyer on average expect a 90,000 gain in May non-farm payrolls, following the 126,000 increase in April. Their forecasts ranged from no change to a gain of 180,000.

Michael Moran, chief economist at Daiwa Securities, expects a 75,000 increase in payrolls, close to the consensus forecast, and said the Federal Reserve would not ease credit on such a report.

Mr. Moran said, though, that if next week's report on May retail sales was weak, the Federal Reserve might cut its funds rate target on that number.

Mr. Lieberman is much less optimistic about the economy. He expects no change in May payrolls and estimated the underlying trend is for 25,000 to 30,000 jobs to be added to payrolls each month.

"That's not much of an recovery," Mr. Lieberman said, and he expects the Fed would cut its funds rate target 25 basis points if the May jobs report is as weak as he thinks it will be.

Analysts note that the employment reports message may be clouded this month because the statistics will include benchmark revisions going back three years.

[Treasury Market Yields]

Prev. Prev.

Friday Week Month

3-Month Bill 3.76 3.75 3.69

6-Month Bill 3.94 3.89 3.85

1-Year Bill 4.22 4.15 4.28

2-Year Note 5.17 5.24 5.30

3-Year Note 5.71 5.79 5.82

4-Year Note 6.58 6.65 6.80

5-Year Note 6.60 6.69 6.80

7-Year Note 6.95 7.02 7.17

10-Year Note 7.31 7.33 7.53

15-Year Bond 7.60 7.57 7.77

30-Year Bond 7.83 7.82 8.00

The market will get a slew of numbers earlier this week, but analysts said most of them won't matter.

"The home sales number might spook the market if you get that big rebound," said Mr. Moran.

He expects tomorrow's report on April new home sales to show a 12% jump, following the 14.8% decline in March and the 6.9% drop in February.

"I think NAPM has a chance to bounce back as well," he added. "If it's stronger than I thought, it could be a factor."

The consensus forecast is for a 52% reading on the May purchasing managers' report, up from 51.3% in April, but Mr. Moran predicted it will rise to 53.0%.

Some traders said the market would also pay close attention to Wednesday's 10-day car sales figures, to see if the improvement that was reported in mid-May sales held up through the end of the month.

Friday's Activity

Treasury notes and bonds posted gains for the third session in a row Friday, with the 30-year bond up 1/4 point to yield 7.83%.

The price increases occurred in thin trading and may have been partly due to managers buying securities to rebalance their portfolios for the end of the month.

Five-year notes, which outpaced other Treasury securities on Wednesday and Thursday, continued to do well Friday, with the when-issued five-year notes closing 3/16 higher.

Traders said there were reports a retail account bought a quantity of five-years at the same time it sold two-year notes.

Prices also got a boost from a rumor the Federal Reserve might cut its requirement for the amount of reserves banks must keep on deposit at the Fed against their demand deposits.

Traders were skeptical of the rumor, though, and analysts said such a move would be highly unlikely.

A Fed spokesman said the Fed does not comment on rumors, but he pointed out that the most recent cut in the reserve requirement, from 12% to 10%, just took effect in April.

Earlier in the session, the Chicago purchasing managers said their survey rose to a seasonally adjusted 54.7% in May from 54.4% in April.

Bob Dieli, a business economist at Nothern Trust Co. in Chicago, said the report was positive even though the gain was small.

The Chicago index has posted gains for four months in a row now, he said. "It's been making slow but steady progress."

The Chicago report showed new orders, the orders backlog and inventories all rose. But the market concentrated on the drop in the employment component, and Mr. Dieli agreed the weakness in the labor market was a problem for the economy.

"Hiring is still not there and that is probably the last bastion of caution," he said. "Employers say, well, we'll work the folks we have longer, until we're sure this [recovery] is for real."

The market paid little attention to the report that the nation's gross domestic product grew 2.4% during the first quarter.

That was up from the 2.0% growth rate reported last month, but well below the consensus forecast for an upward revision to 2.9%.

Economists expected first-quarter growth to jump because the government had overestimated the decline in inventories during the first quarter.

But Cynthia Latta, a financial economist at DRI/McGraw-Hill, said the expected inventory change was offset by the deterioration in net exports, and also by a small decline in final sales.

The June bond futures contract closed 17/32 higher at 10026/32.

In the cash market, the 30-year 8% bond was 1/4 point higher, at 101 25/32-101 29/32, to yield 7.83%.

The 71/2% 10-year note rose 1/8, to 101 4/32-101 8/32, to yield 7.32%.

The three-year 57/8% note was up 1/16, at 10011/32-10013/32, to yield 5.72%.

In when-issued trading, the 51/8% two-year note was 1/32 higher, at 9928/32-9929/32, to yield 5.17%, and the five-year 63/4% note was up 3/16, at 1014/32-1016/32, to yield 6.58%. Both note issues settle today.

Rates on Treasury bills were mixed, with the three-month bill up one basis point at 3.70%, the six-month bill up one basis point at 3.84%, and the year bill one basis point lower at 4.06%.

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