Strong home sales and signs of a healthy labor market conspired to push Treasury prices down yesterday as the dollar showed signs of weakness and market participants continued their inflation watch.
August new single-family home sales were up 9.7%, posting the biggest gain since September 1993's 14.4% advance, the government reported. Home sales in July were revised sharply, to up 1.9% from up 8.3%.
Patrick Dimick, a market economist at CS First Boston Inc., said the 9.7% increase in August sales was largely a result of "the sharp downward revision to the July number" and a 82% rise in Northeast sales. He said the 82% rise was "a statistical anomaly related to the seasonal adjustment process."
But traders owned a lot of bonds going into yesterday's session after Wednesday's $11 billion five-year note auction, and they were looking for a reason to sell, Dimick said. So when the new home sales came out, traders settled long positions, he said.
"The day after [an $11 billion auction], the market is less concerned about the fundamentals than it is about settling long positions," Dimick said.
The benchmark 30-year Treasury bond was down more than half a point yesterday, closing 10/32 lower to yield 7.83%.
Prices first slumped in the morning when the Labor Department reported that initial unemployment claims were down 11,000 for the week ended Sept. 24. New unemployment insurance claims have fallen for four consecutive weeks. With 310,000 people filing new claims last week, the number is at its lowest since 295,000 people filed claims in the week ended Dec. 25, 1993.
The dollar also dipped yesterday after Fred Bergsten, the director of the Institute for International Economics, said the yen would go to a new high if the United States' trade talks with Japan fail. Clinton Administration press secretary Dee Dee Myers indicated yesterday that the talks are making progress but still face serious problems.
Today is the deadline for the United States to reach an agreement before it imposes trade sanctions against Japan. U.S. trade representative Mickey Kantor said he will announce the outcome of the talks at a news conference scheduled for noon tomorrow.
Yesterday, the dollar rose somewhat after the Commerce Department reported a revised gain in U.S. second-quarter real gross domestic product to up 4.1% from up 3.8%. But then the dollar followed the pessimistic U.S. bond market back down again.
The dollar was quoted at 98.60 Japanese yen late in the day, compared to Wednesday's 98.82 close.
John R. Williams, chief global markets economist with Bankers Trust Co., said the dollar was also on the weak side yesterday over concern that Congress won't pass GATT legislation, "which would be a cataclysmic event for global trade."
The Senate Finance Committee approved legislation yesterday that would implement the Uruguay Round accord of the General Agreement on Tariffs and Trade. But Senate Commerce Committee chairman Ernest Hollings on Wednesday threatened to tie up the global trade legislation to block passage before Congress' hoped Oct. 7 adjournment.
"Failure to pass [GATT] could raise inflation concerns" because the strong U.S. economy need not generate worry if global competition keeps prices down, Williams said. "The U.S. consumer and the U.S. bond markets would be the big losers," he said, if Hollings succeeds in killing the sweeping effort to reduce trade barriers between nations.
Williams said that while the Federal Reserve is holding back on raising interest rates, it is still in a tightening mode because economic statistics are quite strong and likely to remain that way for the foreseeable future.
"The only real issue is when that tightening might come," Williams said. "The Fed needs to slow the economy down to a pace that will not generate inflation pressure."
A Treasury bill trader cited the durable goods, GDP, home sales, and unemployment claims numbers as evidence that the economy overheated.
"We think Greenspan has 50 in his pocket," the bill trader said yesterday, predicting that sometime in the first two weeks of October, Federal Reserve chairman Alan Greenspan will raise both the federal funds rate and the discount rate by 50 basis points.
Turning to Treasury bills' continued strength since Tuesday, the trader pointed out that the market was enjoying "end of third quarter effects," so bills are still trading at a premium. Pension funds and trusts are buying for their third-quarter statements, he said, and both Wall Street traders and account buyers are finding that the short end is a safe place to stay before any Fed tightening.
As for the economy's evident strength, Williams pointed out that jobless claims are effectively at their lowest levels in five years. "And home sales data indicate that the most interest rate-sensitive sector of the economy is still performing fairly well," he said.
The September employment report to be released on Oct. 7 is also expected to show strength, Williams said. He expects nonfarm payroll jobs to increase by 250,000. Consensus is between 220,000 and 250,000.
Growth in nonfarm jobs in August was lower than expected, up 179,000 compared with July's 259,000 advance.
The 10-year Treasury note was down 1/4 yesterday to yield 7.61%. The seven-year note also lost 1/4 to yield 7.45%, and the five-year was down 6/32 to yield 7.27%.
The yield on the three-month bill was up six basis points to 4.67%. The yield on the six-month bill also was up six basis points to 5.42%, and the yield on the one-year was up seven basis points to 5.93%.
The December Treasury bond futures contract closed down 15/32 at 98.22.