There is an abundance of economic news this week, but the Treasury market is likely to bide its time until it gets the last and most important of the indicators: Thursday's June employment report.

Treasury prices rallied last week after a couple of surprisingly weak indicators increased the talk about another Federal Reserve easing.

Analysts said the employment report, which is the first comprehensive look at the economy's performance in June, will be a key factor in the Fed's decision.

For that reason, they do not expect the Federal Open Market Committee that begins tomorrow to result in any immediate change in policy.

Joel Naroff, chief economist at First Fidelity Bancorp. in Philadelphia, said the Treasury market was setting itself up for a disappointment.

The market "thinks the economy is starting a summer swoon and the Fed is going to ease," but this week's numbers will be strong enough to shatter that scenario, Mr. Naroff said.

He expects June nonfarm payrolls to rise 115,000, based in part on the recent improvement in manufacturing, and he added that any increase over 100,000 is likely to displease the bond market.

A stronger than expected rise in payrolls would "unwind the [gains at the] short end, which is very much convinced there's going to be another ease and takes the long bond back to the 7.80% to 7.90%" level, Mr. Naroff said.

His forecast is a little above the consensus. Early predictions for June nonfarm payrolls range from a 40,000 gain to a 160,000 gain, but center around a 75,000 increase.

Michael Moran, chief economist at Daiwa Securities America, said there are plenty of reasons for Fed officials to keep policy unchanged, including worries that long-term interest rates reflect "a vote of no confidence in long-term inflation prospects.

"The Fed may want to build long-term, inflation-fighting credibility by holding policy steady," Mr. Moran said, but added, "The outlook could change easily if we get sufficient weakness in this week's data."

He said the Fed would probably ease if payrolls rose less than 50,000 and would feel comfortable about a steady policy if payrolls increase more than 100,000.

Other analysts maintain there is little likelihood of a Fed rate cut at this point.

The recovery is "not very robust, but I doubt the economy will stall out, and I doubt the Fed feels it has to push rates lower to keep the recovery going," said Lynn Reaser, chief economist at First Interstate Bancorp.

Treasury Market Yields

Prev. Prev.

Friday Week Month

3-Month Bill 3.70 3.72 3.76

6-Month Bill 3.83 3.87 3.94

1-Year Bill 4.10 4.13 4.22

2-Year Note 4.88 4.96 5.17

3-Year Note 5.35 5.47 5.71

4-Year Note 6.30 6.40 6.58

5-Year Note 6.32 6.42 6.60

7-Year Note 6.72 6.82 6.95

10-Year Note 7.13 7.23 7.31

15-Year Bond 7.44 7.51 7.60

30-Year Bond 7.77 7.82 7.83

Source: Cantor, Fitzgerald/Telerate

In fact, Ms. Reaser said she thought the next move in the funds rate would be "up instead of down." She said fed funds could move to 4%, from the current 3 3/4% target, sometime in September.

The week's parade of indicators begins with today's May new home sales report. Economists on average expect a 3.4% gain in home sales, to a 545,000 annual rate.

Friday's Trading

Treasury prices closed narrowly mixed Friday after fairly active trading.

Late in the afternoon, the 30-year bond was unchanged to yield 7.77%, and short-term and intermediate notes were marginally lower.

The market disregarded the Commerce Department's report of modest gains in May income and spending, and concentrated on the possibility of getting a Fed interest rate cut next week.

"The market's trading Fed ease," a coupon trader said.

There was reportedly a buyer of $400 million to $500 million of bonds Friday morning. At the other end of the curve, traders reported heavy selling of short-term and intermediate paper.

"The name of the game is extend and pick up some yield," a short-term trader said.

A note trader said current price levels were "a tad scary." He estimated the chances for getting a Fed ease are at best 50-50, and said the market had already priced in half of a quarter-point cut in the funds rate, to 3.5%.

The trader added that the bond market's technicals were no longer as favorable as they had been because inventories of the two-year and five-year note and year bills sold last week are now sitting on dealers' shelves.

"If we don't get an easing after the employment report, it could be bad," he said.

May personal income rose 0.3%, while last month's spending was up 0.5%, but the report was in line with expectations and had no impact on Treasury prices.

Steve Wood, director of financial markets research at Bank of America, said the report confirmed that consumer spending is no longer growing at the rate it was during the first quarter.

After the 5% increase in consumption during the first quarter, "we'll be hard pressed to get a 1% gain in the second quarter, and spending is what's needed to drive this economy forward," he said.

The September bond futures contract closed 1/8 lower at 100 20/32.

In the cash market, the 30-year 8% bond was unchanged, at 102 14/32-102 18/32, to yield 7.77%.

The 7 1/2% 10-year note fell 1/32, to 102 13/32-102 17/32, to yield 7.13%.

The three-year 5 7/8% note was down 1/32, at 101 10/32-101 12/32, to yield 5.35%.

In when-issued trading, the 5% two-year note was unchanged, at 100 6/32-100 7/32, to yield 4.88%, and the five-year 6 3/8% note was off 1/32, at 100 5/32-100 7/32, to yield 6.32%.

Rates on Treasury bills were higher, with the three-month bill up one basis point at 3.64%, the six-month bill up two basis points at 3.73%, and the year bill up two basis points at 3.95%.

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