A weaker-than-expected revision in second-quarter gross domestic product and a resurgent dollar helped lift U.S. government securities prices on Friday.
With a summer Friday's typically low trading volume magnifying the gains, traders were able to parlay the firmer tone into heady progress by midday before the market settled back down to a more modest increase. After being up more than a point by mid-afternoon, the benchmark 30-year Treasury bond closed up 5/8 of a point to yield 7.47%. "We got it going and pushed it up, testing the highs," one trader said. "The bottom line here is that technicals in the market are still pretty good, and right now the market is in pretty good shape."
Whether Friday's advance can be translated into a sustainable rally remains to be seen, but the tone going into a slew of economic indicators this week is positive, traders said.
The market got off to a rousing start Friday when the Commerce Department reported a revised second-quarter GDP growth of 3.8%, up marginally from the originally reported 3.7% gain. Economists and traders had expected the increase in GDP to be revised upwards to as much as 4.2%.
"Most people were looking for 4.2% GDP, but we only got revised up a tenth of a point. That kind of bid the market up," one trader said. "The market sold off a bit [Thursday] with people going long in the five-year [note], and that drove the market lower. The Street got a little short, but with [Friday's] numbers better than expected, you got new buyers and the shorts had to be covered."
Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp., said the downward revision of final sales in the GDP was particularly surprising, and portends a slowdown in economic growth in the rest of the year.
The final sales component, which incorporates total government purchases, personal spending, fixed investment, and real net exports, was revised to 1.4% from 1.5% originally. The revised figure represents the smallest gain in final sales since 0.2% in the first quarter of 1993.
"What's important to realize is that all of the strength in the first half of the year was due to inventory accumulation," Schaja said. "Weak final sales continues to suggest we will see some softening in the second half of the year."
Lower consumer demand coupled with high inventories could result in a slowdown in manufacturing in the second half of the year, economists said, and provide the first tangible evidence that the Federal Reserve's tightening policy has begun to influence the economy.
"You can see the seeds of slower growth starting to germinate," said Anthony Chan, chief economist at Bank One Investment Advisers. "With an upward revision in inventory, you're probably going to see some nonbelievers get religion that [the numbers] are going to lead to softer growth [and] softer production."
The "second half" of the story on Friday was the "very positive move" in the market thanks to a strengthening dollar, Chan said.
Late Friday, the dollar was quoted at 100.40 Japanese yen, up from 99.65 on Thursday, and 1.5745 German marks, compared with 1.5423 the previous day.
The "surge" against those currencies was due to the fact that "people in the market are starting to believe that trade negotiations [between the United States and Japan] are being conducted now in a more constructive atmosphere," Chan said. "Both sides have given signals that they're anxious to reach a compromise."
The Treasury market's performance also buoyed the dollar, economists said, because a stronger Treasury market will lure foreign investors who need dollars to buy U.S. government securities.
"That puts an upward bias on currency and can lead to a snowballing effect where the higher currency helps Treasuries," Chan said.
From nearly all accounts, the market is well-positioned ahead of several key economic indicators scheduled to be released this week, culminating with the August employment and payroll numbers on Sept. 2.
The employment figures and the National Purchasing Managers' report to be released this Thursday will hold the key to the market's tone for the next few weeks, traders said, predicting that governments will "waffle" in a trading range until the end of the week.
But economists noted that this week also brings July personal consumption figures today, new home sales and consumer confidence tomorrow, and factory orders and leading indicators for July on Wednesday. These figures will help solidify or refute statistics from sources the market has been trading off of in recent weeks, like the Johnson Redbook and the Philadelphia Purchasing Managers Index, the economists said.
In the corporate bond market on Friday, traders quoted high- yield securities up 1/2 to 3/4 on very light activity.
"There was strong dealer activity trying to hold up pricing because most have heavy inventory in high yields, but there was very little actual trading," one junk bond trader said. "It's about as slow as its been all summer."
One exception in high grades were Viacom bonds, which market sources reported down from the highs reached on Aug. 24 after news broke that the board of Blockbuster Entertainment Corp. had approved a merger with Viacom. Viacom's bonds were quoted up as much five points last week following the announcement.
But profit-taking and concern that Viacom's shareholders might nix the agreement conspired to dampen the firm's bonds on Friday, market sources said.
In investment-grade securities, traders reported "nothing going on" and "very little activity."
"Spreads were stable, prices moved in conjunction with Treasuries, but there's really nothing to report," one trader said. "There's not been a single new issue brought in the investment-grade sector today." Treasury Market Yield Previous Previous Friday Week Month 3-Month Bill 4.65 4.65 4.366-Month Bill 5.04 5.09 4.841-Year Bill 5.55 5.64 5.342-Year Note 6.19 6.17 5.993-Year Note 6.46 6.53 6.245-Year Note 6.86 6.89 6.717-Year Note 7.03 7.07 6.8710-Year Note 7.21 7.24 7.0930-Year Bond 7.47 7.48 7.38 Source: Cantor, Fitzgerald / Telerate