The Treasury market rallied yesterday on the eve of the September employment report when a trio of weaker-than-expected economic reports inspired a wave of retail buying.
Late yesterday, the 30-year bond was up 3/4 point and yielded 7.31%.
The numbers that boosted prices were a four-point drop in the September Purchasing Manager's Index, a 15,000 increase in weekly jobless claims, and a 0.8% drop in August construction spending.
Charles Lieberman, a managing director at Chemical Securities, said yesterday's indicators "just cap off a series of weak reports covering virtually the entire economy."
"The obvious risk is the economy could be suffering a renewed bout of weakness, what some economists have referred to as the triple dip," Mr. Lieberman said.
The reports suggested today's September employment data will be equally weak, and increased the market's belief that the Federal Reserve will have to ease monetary policy within the next few trading sessions.
First Fidelity Bank of New Jersey went ahead and lowered its prime rate a 1/2 point yesterday, to 5 1/2%, apparently regarding a Fed easing as a foregone conclusion.
The consensus forecast calls for a 115,000 decline in September non-farm payrolls, or a 38,000 increase if teenagers leaving federally funded summer jobs are excluded. Economists expect the unemployment rate to rise to 7.8% from the 7.6% reading in August.
Analysts caution that September's employment report will be even more confusing than usual because the market will be trying to sort out the impact of Hurricane Andrew and teacher's strikes in Detroit and Rhode Island.
Most economists expect the report will be weak and the Federal Reserve will respond by cutting the funds rate 25 basis points to 2 3/4% and the discount rate a half point, to 2 1/2%.
They say the timing is uncertain. Unless the employment report is remarkably weak, many analysts think the Fed will wait to act until Tuesday, when the Federal Open Market Committee meets.
There has been speculation all week that foreign central banks would ease monetary policy at the same time the Fed loosens credit. Coordinated rate cuts would mitigate the impact of a Fed easing on the dollar, but most analysts are not convinced that the German Bundesbank, the key player in Europe, is ready to ease policy.
Traders said that with yesterday's rally, the Treasury market has already accounted for a 25-basis-point cut in the funds rate in current price levels. Some expect a sell-off today unless the employment report is far worse than expected.
A note trader speculated dealers were going into the jobs data with long or flat positions. He said he thought there were very few short positions in the market. Given the strong retail buying that reportedly occurred yesterday, "I have to wonder who needs to buy paper after the number," the trader said.
But Kevin Flanagan, a money market economist at Dean Witter Reynolds Inc., said he thought the market had room to improve further, He said the two-year yield might moved to 3.60% on a weak jobs report form its current 3.68% level.
Mr. Lieberman said the market could move higher because investors would start to price in the next Fed easing move. "I can easily imagine investors saying there's got to be more coming," he said.
Treasury prices began to improve yesterday morning when the Labor Department said new claims for unemployment insurance rose 15,000 in the week ended Sept. 19, to a seasonally adjusted level of 429,000, when the consensus forecast called for a small decline in claims.
The number of workers filing for federal benefits in the same week increased 6,718, to an unadjusted level of 24,331. The government also reported that in the week ended Sept. 12, the number of people receiving state benefits rose 121,000, to 3.292 million.
"These were really pretty bad numbers," said Marilyn Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp. "We're seeing a major deterioration" in the labor market.
The rally picked up steam when the National Association of Purchasing Management said its index had dropped to 49.0% in September, from 53.7% in August, Economists had expected only a small slide in the number.
It was the first time since January that the index had fallen below 50%. According to the association, a reading below 50% shows the manufacturing sector is contracting, while a reading below 44.5% shows the economy as a whole is contracting.
The new orders component of the report plunged 10 points, to 49.6%, in September, and Robert J. Bretz, chairman of the purchasing managers' survey committee, said "until new orders return to growth levels, the economic malaise will likely continue."
The report also showed declines in September production, inventories and employment. Traders said the decrease in the employment component to 45.2% from 47.2%, its lowest level since April, was particularly encouraging to the bond market because it suggested the jobs data today would show corresponding weakness.
The 0.8% decline in August construction spending was seen as further evidence of economic weakness.
Traders said they saw good retail buying after the claims data and even better buying after the purchasing managers' report, with the heaviest buying occurring in short-term and intermediate securities.
Long-term prices drifted a little lower after the close of futures and then bumped down a notch when Ross Perot announced he was reentering the presidential race.
Traders said Mr. Perot's announcement encouraged profit-taking because it added to the uncertainty surrounding the presidential election.
Another trader said the $5.3 million jump in the nation's M1 money supply might have been another factor in the late-day price declines.
A spokesman for the Federal Reserve Bank of New York said at the bank's weekly press briefing that M1 rose $5.3 billion to $991.5 billion in the week ended Sept. 21, while the broader M2 aggregate dropped $1.3 billion, to $3.5 trillion, and m3 jumped $7.2 billion, to $4.2 trillion, in the same period.
The December bond futures contract closed 30/32 higher at 106 8/32.
In the cash market, the 7 1/4% 30-year bond was 23/32 higher, at 99 2/32-99 6/32, to yield 7.31%.
The 6 3/8% 10-year note rose 26/32, to 100 28/32-101, to yield 6.23%.
The three-year 4 5/8% note was up 10/32, at 101 8/32-101 10/32, to yield 4.13%.
In when-issued trading, the seven-year note to be auctioned Wednesday was bid at 5.81%.
Rates on Treasury bills were lower, with the three-month bill down nine basis points at 2.60%, the six-month bill off nine basis points at 2.75%, and the year bill nine basis points lower at 2.86%.
In other news, the New York Fed reported the federal funds rate averaged 3.41% for the week ended Wednesday, up from 3.07% the previous week.
Treasury Market Yields
Thursday Week Month
3-Month Bill 2.63 2.93 3.13
6-Month Bill 2.80 2.99 3.20
1-Year Bill 2.94 3.14 3.29
2-Year Note 3.68 3.88 4.06
3-Year Note 4.13 4.35 4.53
5-Year Note 5.20 5.44 5.47
7-Year Note 5.75 5.99 6.01
10-Year Note 6.23 6.45 6.51
30-Year Note Bond 7.31 7.41 7.35
Source: Cantor, Fitzgerald/Telerate