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US Treasuries subdued by talk of strong payrolls
Thu Feb 3, 2005 10:53 AM ET
(Adds ISM data, reaction, updates prices)
NEW YORK, Feb 3 (Reuters) - Treasuries prices were modestly lower on Thursday after U.S. economic data showed surprising strength in the labor market and a slowdown in productivity, both of which could prove inflationary if sustained.
The market did come out of its trough after a survey of the giant U.S. services sector proved a little softer than expected. The Institute for Supply Management's measure of activity in non-manufacturing pulled back 4.7 points to 59.2 in January, when analysts had looked for a dip to 61.3.
But the market remained cautious ahead of the January payrolls report on Friday as past surprises in this series have led to huge shifts in yields.
"All the talk in the market is about a figure of 200,000 or more, perhaps a lot more," said one trader at a primary dealer. "Of course, that means the market could rally if the outcome is only in line with forecasts. But for now, discretion is the better part of valor."
Analysts in a Reuters poll looked for payrolls to rise 190,000 in January after a 157,000 gain in December.
The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) fell 5/32 in price, lifting yields to 4.17 percent from 4.15 percent. The 30-year bond (US30YT=RR: Quote, Profile, Research) dropped 6/32, taking its yield to 4.59 percent from 4.58 percent.
Two-year note yields (US2YT=RR: Quote, Profile, Research) rose to 3.33 percent from 3.32 percent, while those on the five-year note (US5YT=RR: Quote, Profile, Research) climbed to 3.75 percent from 3.73 percent.
Treasuries took an early spill after data showed initial jobless claims fell to 316,000 last week from a 325,000 the week before.
Other data showed productivity slowed more than expected to an annualized 0.8 percent last quarter from 1.8 percent in the third quarter. As worker output per hour slipped, unit labor costs rose to 2.3 percent.
All together the figures were troubling from an inflation point of view and merely reinforced expectations for more rate hikes from the Federal Reserve.
"The good news is that the productivity numbers will almost certainly be revised higher, thanks to the pile of evidence already pointing to an upward revision to GDP," said Ian Shepherdson, chief economist at HighFrequency Economics.
"The bad news is that no plausible revision can change the big picture of slowing growth in productivity and a gradual upturn in unit labor costs," he said.
"It is (Fed Chairman Alan) Greenspan's fear that the current setting of monetary policy is too loose to slow these trends, which is why he is not going to stop raising rates anytime soon," concluded Shepherdson.
The Fed hiked rates a quarter point to 2.5 percent on Tuesday and the market (0#FF:: Quote, Profile, Research) has priced in further increases to at least 3.00 percent by the summer.
