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US TREASURY OUTLOOK-Jobs data, ECB decision take spotlight By Richard Leong NEW YORK, July 2 (Reuters) - The U.S. government debt market will likely be choppy on Thursday, as traders brace for possible surprises in the government's payroll report and an interest rate decision from the European Central Bank. Signs of more U.S. labor deterioration would further punish a battered stock market and increase the safe-haven appeal of Treasuries. They will also likely lead traders to pare their bets on the Federal Reserve raising interest rates later this year, analysts and investors said on Wednesday. "A bad payroll number could boost bonds and put some pressure to pare expectations of a rate hike this summer," said Steve Point, lead portfolio manager at Glenmede Investment Management in Philadelphia. Moreover, another surge in the unemployment rate will cement market expectations that a rate increase will inflict damage to the consumer sector, which is already bogged down by sky-high gasoline prices and tighter credit, investors said. "It'll show a malaise that is already being played out in consumer spending," Point said. Economists predicted employers cut 60,000 jobs in June, according to recent Reuters poll. It would be the sixth straight monthly job loss and the longest such streak in eight years. In the first five months of 2008, private and government payrolls have shed nearly 325,000 jobs. Moreover, analysts forecast the jobless rate likely dipped to 5.4 percent last month from May's 5.5 percent, its highest in more than 3-1/2 years. The U.S. Labor Department will release its June employment figures at 8:30 a.m. (1230 GMT) on Thursday. The monthly payroll data typically comes out on a Friday, but the government will be shut this Friday for the July Fourth holiday. The bond market will close early on Thursday and stay closed on Friday. ECB SETS TABLE Before the payroll report, the Treasuries market could be roiled or soothed by the reaction in the euro zone debt market after the European Central Bank announces its rate decision and hints whether it is on a rate-raising path. Last month, ECB officials and their Fed counterparts intensified their anti-inflation rhetoric amid record high oil and food prices. This resulted in a dramatic sell-off in Treasuries and euro zone debt; traders began to anticipate rate hikes from the two central banks in the second half of 2008. At one point, ECB President Jean-Claude Trichet hinted he would not rule of a rate increase at the bank's July meeting. "I think it's been fully priced in," Michael Kastner, head of fixed income at Sterling Stamos Capital Management in New York, said of a widely expected quarter-percentage-point rate increase by the ECB on Thursday, adding that such a move will likely have a greater impact on the dollar than Treasuries. This week's data showed record year-over-year inflation readings in the euro zone. "If the ECB feels the need to embark on a number of rate hikes to battle inflation rather just tweaking monetary policy, you could see the dollar weakening," Kastner said. Some analysts and investors believe further weakness in the dollar could motivate the Fed to raise rates in a bid to ease the upward pressure on a red-hot oil market. But others argue the Fed cannot risk tipping a weak U.S. economy into recession by raising rates. "The tone of the bond market has been influenced recently by a resurgence in concerns about the economy and the impact of record oil on consumer spending," Glenmede's Point said. On Thursday, benchmark 10-year Treasury note's price finished up 9/32 at 99-7/32. Its yield which moves in the opposite direction of its price, was 3.97 percent, down from 4.01 percent late on Tuesday. (Reporting by Richard Leong; Editing by Jonathan Oatis) ((richard.leong@thomsonreuters.com ; +1 646 223 6313; Reuters Messaging: richard.leong.reuters.com@reuters.net))
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