*

U.S. inflation rises moderately on April

*

Chicago PMI for May comes in much lower than expected

*

U.S. 2-, 10-, 30-year on pace for best monthly gain since

December

*

U.S. yield, a bull flattener, slightly increases inversion

(Adds new comment, bullets, Chicago PMI data, monthly

milestones, and yield curve; updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, May 31 (Reuters) - U.S. Treasury yields fell

on Friday after data showed U.S. inflation stabilized in April,

in line with expectations, suggesting the Federal Reserve's

interest rate cut plans later this year remained intact.

Analysts said the Fed may have to wait for several months of

data showing inflation is decreasing before starting the easing

cycle.

The personal consumption expenditures (PCE) price index, the

Fed's preferred measure of inflation, rose 0.3% last month, data

showed, matching the unrevised gain in March. Monthly inflation

readings of 0.2% over time are needed to bring inflation back to

target.

In the 12 months to April, the PCE price index rose 2.7%

after climbing by the same percentage in March. Economists

polled by Reuters had forecast it would climb 0.3% on the month

and 2.7% on a year-on-year basis.

"This is a favorable report showing that core (inflation) is

slowing and perhaps some of that seasonality that they have

identified that has come in the first quarter of the year is

coming off, and now we're resuming the slowing that we saw in

the second half of last year," said Michael Lorizio, senior

fixed income trader at Manulife Investment Management in Boston.

"This has all shown continued progress towards what they

have identified as their expectations for the end of 2024,

seeing core PCE somewhere in that 2.6%-2.7% range. This month

shows some significant progress and really, really a change from

the trend that we had seen to begin the year in that first

quarter, which displayed the seasonality that often does show up

in the first quarter."

Consumer spending, which accounts for more than two-thirds

of U.S. economic activity, increased by 0.2%, but down from a

downwardly revised 0.7% rise in March.

The benchmark 10-year yield slid 5.9 basis points to 4.494%

after the data. On the month, however, the 10-year

yield rose 19.1 bps, on track for its best monthly gain since

December.

U.S. 30-year yields were down 5.3 bps at 4.631%,

advancing 15.8 bps in May, the largest monthly rise since

December as well.

On the front end of the curve, the two-year yield, which

reflects the U.S. rate move expectations, slipped 1.7 bps to

4.912%. For the month, two-year yields were up 16.9

bps, again the biggest monthly gain since December.

In addition, the Chicago purchasing managers' index (PMI),

a barometer of business activity in the U.S. Midwest, came in at

35.4 vs a 41.0 estimate. May's reading was the lowest in four

years.

The Chicago PMI data further pushed Treasury yields lower.

After the PCE and Chicago PMI reports, fed funds futures

slightly increased the chances of a rate cut in September to

around 55.3%, according to LSEG's rate probability app. It was

slightly below 50% earlier this week.

The futures market is still pricing in just one rate cut of

25 bps this year.

The U.S. yield curve, meanwhile, marginally increased its

inversion on Friday. The spread between U.S. two- and 10-year

yields, widely viewed as a predictor of economic recessions, was

at minus 38.6 bps, compared with minus 38.3 bps

late on Thursday. The inversion went as deep as minus 41 bps

following the Chicago PMI report.

The current curve is effectively a "bull flattener," a

scenario in which long-term interest rates are falling faster

than shorter-dated ones. This often precedes a Fed rate cut,

analysts said.