The municipal market got an early boost to prices Friday morning from the report that non-farm payrolls rose 298,000 in July.
Although this large an increase would generally suggest an improved employment picture, traders and economist on Friday said the U.S. is having a difficult time creating permanent jobs.
The Labor Department reported that 75,000 of the jobs were due to a federally funded summer jobs program.
At the same time, the June figure was revised down from a 117,000 to 63,000 decline - a smaller than expected revision.
Philip Braverman, chief economist at DKB Securities, said the employment numbers do not suggest a great deal of optimism for the economy - something the municipal market was counting on.
"I think there was a growing recognition that the employment report was much weaker on second and third glance,: Mr. Braverman said. "The unadjusted figure, minus the seasonal adjustment, said that July non-farm payrolls had actually decreased significantly."
"When all the seasonal data is waded through, I think there will be a renewed call for the Fed to ease," he said.
In this week's issue of Standard & Poor's Corp.'s Credit Week Mr. Braverman states that the nation's economy is headed for a "triple-dip downturn."
Municipal traders said the employment news, especially the report that New York City's unemployment rate has reached a 16-year high at 12.1%, caused prices to move higher throughout the morning session.
"The jobs the report says were added to the payrolls figure are just not real jobs," said the head of a trading desk." "The reality is that in September, many of these jobs will disappear, and the long-term employment picture will continue to be bleak."
It was also announced on Friday morning that the unemployment rate slipped only 0.1% in July, to 7.7%; the average daily workweek and average hourly earning remained unchanged; and overtime hours worked were slightly lower.
"The whole batch of numbers suggests weakness in the economy," the trading desk head said.
Traders said most of Friday's activity occurred within the two hours after the release of the number, and that the tax-exempt market eased into weekend quietly.
Another municipal participant said that the bid side improved "for the first time in about a week and a half."
"There's some positioning going on," the trader said. "It looks like next week's action will be pretty dependent on economic numbers."
The calendar of releases for next week is prepared with several important numbers for the tax-exempt market.
On Wednesday, the producer price index will be released. On Thursday, the consumer price index will be released, giving investors a look at inflationary pressure.
Mr. Braverman said he sees this week's economic news to be a boost for municipal prices. "I expect producer prices to be flat, and consumer prices to be only 0.2% higher," he said.
Although the municipal market has manageable slate of pricings this week. Treasury investors will have to absorb $36 billion in new three- and 10- year notes, and 30- year bonds.
Market participants said the inflow of Government paper may weigh down municipal prices, but there is still "extraordinary demand for new municipal paper."
One municipal analyst said with the unprecedented amount of deals priced this summer, the municipal market is on track to break all records for yearly issuance.
Glen Rauch, president of Glen Rauch Securities in New York, said it appears as if more and more municipalities will be "jumping on the bandwagon" and selling bonds,
"Usually July and August are or real down times," Mr. Rauch said. "But what we are seeing now is that towns and counties that would usually refund bonds in the fall are doing it now."
"The new deals are coming at very good rates for issues, but in a few weeks, we may be clamoring for those yields," he added. "The municipal market, despite a tough week, has a lot of very positive underlying factors."
Mr. Rauch also said that as state governments are forced to make more infrastructure improvements, new-money issuance will continue skyward.
Looking ahead to this week's slate, at least $3 billion in bonds are expected to come to market.
Traders said there are several large deals to capture the attention of investors.
In the negotiated sector, deals scheduled to be priced include $600 million Pennsylvania Turnpike Commission revenue bonds, senior-managed by Pittsburgh-based RRZ Public Markets Inc.; $350 million New York State Thruway Authority general revenue bonds, managed by Dillon, Read & Co.; and $257 million Massachusetts Municipal Wholesale Electric Co. power supply system revenue bonds, managed by a group led by Goldman, Sachs & Co.
In the competitive sector, the largest issue on the calendar is $77 million Durham Co., N.C., general obligation bonds.
Several municipal participants said that as the Republican national convention nears, presidential politics will start to have a more concrete effect on municipal prices.
Mr. Rauch said that "if Democratic Presidential candidate Bill Clinton is elected in November, we could be seeing an increase in taxers." A rise in taxes will drive more investors toward the tax-free market as a safe haven for investments, he added.
One municipal analyst said that usually as the incumbent President's convention looms, that his popularity rises. But that has not occurred so far with this campaign.
"Unless something radical happens and the Democrats make a major mistake, we are going to see a new man in the White House next year," the analyst said. "That bodes well for our market."
Secondary market participants said prices were 1/4 to 3/8 higher, with little activity to report after around 11:00 a.m.
In secondary dollar bond trading, newly freed New York City Water Authority FGIC 5 3/4 of 2018 were quoted at 96-1/4 to yield 6.05%; Wisconsin] Transportation Authority Rev 5 1/2s of 2022 were quoted at 91 1/8-1/2 to yield 6.15%; and Jacksonville Electric Authority 5 1/2s of 2014 were quoted at 93 1/4-94 to yield 6.06%. Los Angeles Department of Water and Power 6s of 2030 were quoted at 97 1/2-3/4 to yield 6.16%.
In short-term action, traders reported a quiet day with yields remaining the same at or just slightly lower on the session.
In late trading, Iowa and revenue anticipation notes 3 1/2s were quoted at 3.05% bid, 3.00% offered; Los Angeles Trans 3 3/4s were quoted at 2.88% bid, 2.86% offered; and New York City Trans 3 1/4s were quoted at 2.83% bid, 2,75% offered. Wisconsin Trans 3 3/4s were quoted at 2.90% bid, 2.85% offered,while New York State Trans 3.65s were quoted at 2.93% bid, 2.90% offered.
The September municipal futures contract settled up 12/32 to 98.27.