Bonds Drop Again and Hunker Down for Tomorrow's Jobs Report

Treasuries were unable to pull themselves out of an early hole as trading was light ahead of tomorrow morning's economic releases.
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After taking its lumps in the morning following the new homes sales release, the bond market buckled down for tomorrow's employment report. Since traders are reluctant to take on risk one day before the market's most important monthly release, Treasuries were unable to snap back from the early spate of negativity.

Lately the 30-year Treasury bond was down 8/32 to 97 13/32, bumping the yield up 3 basis points to 6.32%. It would seem that the market could rally tomorrow if the November employment report shows a loosening in labor conditions. Since the

Fed

raised the funds rate to 5.5% on Nov. 16, the market's done almost nothing but sell, tacking on more than 30 basis points to the 30-year bond's yield.

But analysts believe that the Fed's current tough-talking stance and the stream of economic releases displaying broad economic strength puts limits on any positive reaction to the jobs report.

"It's hard to see how it would be wonderfully positive," said Jim Kochan, chief market strategist at

Robert W. Baird

. "Average hourly earnings would have to decrease and unemployment would have to rise. It's going to be difficult to rally this market in a big way."

That's partially because even if the employment report showed signs of slackening in labor, the rest of the economy is steaming along. Economists often use the housing market to predict a slowing in economic activity.

As the theory goes, people who buy homes are expected to actively consume in the next few years, through home improvement projects, furniture purchases and the like. When the housing market slows, it shows consumers are less confident about current interest rates and their own purchasing power.

Well, sales of new homes rose an astounding 16.3% in October to a seasonally adjusted annual rate of 986,000, surpassing November 1998's record pace of 985,000. That's even as mortgage rates increased (although the

Mortgage Bankers Association

shows people are increasingly turning to cheaper adjustable-rate mortgages).

It shows that consumer demand remains strong and there may not a discernable slowdown as Y2K approaches, which was originally forecast. The market reacted negatively to today's figure and trended downward for the balance of the session, but activity was light.

"What it comes down to is, the consumer's very confident," said David Jones, chief economist at

Aubrey G. Lanston

. "They're very secure in their jobs, financially secure, they're seeing a rebound in stock prices and their financial position is improving. There's a wealth effect from higher house prices and that just leads to stronger spending everywhere."

There are a couple of problems with this figure: it's volatile and is subject to wild swings and large revisions. (September's number was revised downward to 848,000, an 8% decline.) Also, today's report contradicts the 6.6% decline in October's

existing homes sales

, reported Monday. "It makes a muddle out of trying to understand what's going on in the housing sector," Kochan shrugged.

Expectations for tomorrow, according to

Reuters

, are for a 226,000 increase in

nonfarm payrolls

and a 0.3% increase in

average hourly earnings

. The

unemployment rate

is forecast to remain steady at 4.1%.