Short-term prices may edge lower as traders focus on inflation data.

The Treasury market's worries about inflation and a possible Federal Reserve tightening are expected to keep short-term prices under pressure this week.

Because of traders' fears that price pressures are accelerating. Friday's May employment report will probably be overshadowed by the May consumer and producer price indexes, which will not begin arriving until next week.

The outsized gains posted in April producer and consumer price indexes focused the market's attention on inflation, and on the possibility that the Federal Reserve will boost short-term rates to keep price pressures under control.

Last week. short-term Treasury prices deteriorated steadily amid reports that the Fed adopted a bias toward a tighter policy in the wake of the April price reports and that the vote had been almost unanimous.

CNBC, a cable network, reported that 0.4% gains on the core rates of May consumer and producer prices would result in a tightening.

Given the possibility the May inflation reports could trigger a Fed tightening, "there's going to be so much attention focused on those numbers, it'll be incredible," said Steven Wood, director of financial markets research at Bank of America.

A strong employment report this week could also feed the market's worries, since better economic growth gives the Fed more leeway to tighten. As of last week, the consensus forecast called for a 119,000 increase in May jobs compared with the 119,000 April gain.

Joel Naroff, chief economist at First Fidelity Bancorp. in Philadelphia, expects a better report, with a rise of about 200,000 in payrolls. He said: that kind of number, combined With the generally upbeat economic indicators he expects earlier in the week, would send, Treasury prices lower.

But Naroff thinks Fed policymakers will be reluctant to raise short-term rates given the lackluster growth that was demonstrated most recently by last Friday's downward revision to first-quarter output. First-quarter gross domestic product now shows only a 0.9% rise, down from the 1.8% gain originally reported.

"I think [the GDP] number makes it very, very difficult for the Fed to do anything for two to three months." Naroff said.

Most analysts agree that the pace of economic growth argues against a Fed tightening.

But some point out that the CNBC report saying 0.4% gains in the May core rates would trigger a move has limited policymakers' options, because a failure to react could shake financial markets' confidence in the Fed.

"Now they almost have to go forward and tighten" if the numbers come in that way, said Kathleen Camilli, chief economist at Maria Fiorini Ramirez Inc.

The dollar's weakness is also adding to the speculation about a Fed tightening, although analysts point out that the dollar is holding up fairly well against currencies other than the yen.

Dana Johnson, a vice president at the First National Bank of Chicago, said that logic would not stop the market from following the dollar's moves. "The market has been sensitized to anything that would led to a risk of higher inflation, and definitely a weaker dollar is one of those risks," he said.

Analysts and traders said the short end of the market could erode further as it waits for the inflation reports. "I think the short end will continue to be driven by investor flows, as prices are marked down on an expectation of a tighter Fed somewhere down the road," Camilli said. "People are liquidating positions and extending out on the curve, or else as paper matures they just keep it in overnight repo [repurchase agreements] or one-month repo."

Camilli expects the yield on the two-year note to get to 4.50% within the next few weeks. It closed at 4.24% on Friday.

The Treasury market showed little reaction Friday to the news that the House had passed President Clinton's deficit reduction package by a narrow vote, and analysts said that with Congress recessed, political Considerations will fade into the background this week.

During Friday's shortened trading session, intermediate and long-term Treasury prices lost ground despite the mostly favorable economic news.

The 30-year bond closed 5/8 point lower, where it yielded 6.97%.

Short-term prices initially posted small gains when the Commerce Department said the preliminary estimate of first-quarter gross domestic product had been halved to 0.9%. The consensus forecast called for a smaller downward revision, to a 1.3% gain.

The weaker-than-expected output in the first quarter offset some of the market's worries about a Fed tightening.

But Wood of Bank of America said the GDP statistics did not tell the bond market anything it did not already know. The revision resulted from a big downward revision to first-quarter net exports and an upward revision to business investments, both of which were expected, he said.

Traders said some short covering and Fed purchases of short-term notes also helped the market early in the New York session.

But the market eventually stalled out, and when there was no follow-through from the earlier gains, prices began to fall.

The sell-off accelerated when the June contract broke through a support level at 110 24/32. The long end was off almost a full point before bouncing back.

The rest of Friday's economic news had little impact on prices.

The Chicago purchasing managers' May index fell to a seasonally adjusted 53.1 % from the 54.3% April reading, as inventories, production, and order backlogs all posted big drops. The Chicago number, together with the weak May report from the Philadelphia Fed, suggests that today's national purchasing managers' index for May may weaken from the 49.7% April reading.

Also Friday, the University of Michigan's May index of consumer sentiment fell to 80.3%, from the 85.6% April reading, in line with the weakness seen in the Conference Board's report.

The June bond futures contract closed 23/32 lower at 110 14/32.

In the cash market, the 7 1/8% 30-year bond was 5/8 lower, at 101 24/32-101 26/32, to yield 6.97%.

The 6 1/4% 10-year note fell 3/8, to 100 22/32-100 24/32 to yield 6.14%.

The three-year 4 1/4% note was unchanged, at 98 31/32-99 1/32, to yield 4.60%.

In when-issued trading, the 4 1/8% two-year note was unchanged at 98 31/32-99 1/32, to yield 4.60%, and the 5 3/8% five-year note was 1/32 lower, at 99 31/32- 100 1/32, to yield 5.36%.

Rates on Treasury bills were mixed, with the three-month bill up one basis point at 3.07%, the six-month bill down one basis point at 3.22%, and the year bill eight basis points higher at 3.48%.Treasury Market Yields Prev. Prev. Friday Week Month3-Month Bill 3.11 3.05 2.946-Month Bill 3.29 3.20 3.041-Year Bill 3.60 3.42 3.252-Year Note 4.24 4.09 3.793-Year Note 4.60 4.53 4.175-Year Note 5.36 5.30 5.107-Year Note 5.77 5.75 5.5910-Year Note 6.14 6.14 6.0130-Year Note 6.97 7.02 6.92

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