November 1, 2018 / 7:27 PM / 18 days ago

TREASURIES-Manufacturing, productivity slowdown dampens yields ahead of jobs data

(Recasts, updates yields, adds analyst quotes)

By Kate Duguid

NEW YORK, Nov 1 (Reuters) - Reports of a slowdown in U.S. manufacturing, construction and productivity left yields lower ahead of Friday’s monthly jobs report which will inform the Federal Reserve’s decision on whether to raise interest rates in December.

Yields across maturities fell on Thursday after the Institute for Supply Management (ISM) said its index of national factory activity fell to a six-month low of 57.7 points last month from 59.8 in September. A reading above 50 indicates growth in manufacturing, which accounts for about 12 percent of the U.S. economy. Treasury yields typically fall on expectations of lower economic growth.

In addition to the ISM report, the Markit U.S. Manufacturing PMI was revised marginally downward for October to 55.7 from a preliminary reading of 55.9. The Commerce Department also reported that construction spending was unchanged at a record high in September.

“This is consistent with our perception that the numbers in the U.S. still look good but the momentum looks to be slowing,” said Bill Merz, head of fixed income research at U.S. Bank.

Also contributing to lower yields was a Labor Department report that showed productivity growth slowed in the third quarter though the figure was slightly above expectations.

Nonfarm productivity, which measures hourly output per worker, increased at a 2.2 percent annualized rate in the last quarter, slower than the 3.0 percent growth in the second quarter. The previous quarter’s number was the strongest since the first quarter of 2015.

Yields across maturities were down around 2 basis points, with the yield on the 10-year benchmark note last down 1.9 basis points at 3.138 percent.

The fall in yields, however, was somewhat tempered by reports of U.S. labor market tightening. New applications for U.S. unemployment aid fell last week and the number of Americans receiving benefits was the lowest in more than 45 years.

Low jobless claims, and Wednesday’s better-than-except ADP National Employment Report were encouraging signs for Friday’s nonfarm payrolls, in spite of mixed data on Thursday.

“Friday’s jobs report has the potential to be breaking news as the tier one data could push Treasury yields from the range they have held since early October. We suspect average hourly earnings will be much more crucial than nonfarm payrolls in determining the direction of a break,” said Ben Jeffery, trading products analyst at BMO Capital Markets.

Wages have remained stubbornly low in spite of tightening labor market conditions, and evidence of wage growth would push yields up and boost the case for the Fed to raise rates for a fourth time this year at its December policy-making committee meeting.

Reporting by Kate Duguid Editing by Susan Thomas and Chizu Nomiyama

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