(Updated at 1500 EDT/1900 GMT)

By Karen Brettell

June 3 (Reuters) - Benchmark U.S. Treasury yields fell

to a two-week low on Monday after data showed that U.S.

manufacturing activity slowed for a second straight month in

May, boosting expectations that a softening economy may allow

the Federal Reserve to cut interest rates later this year.

Manufacturing weakened as new goods orders dropped by the

most in nearly two years, while a measure of input inflation

fell back from the highest since mid-2022.

U.S. construction spending also fell unexpectedly for a

second consecutive month in April on declines in non-residential

activity.

"On the one hand, this (manufacturing data) is another

survey that seems to show pessimism and weaker economic

activity. On the other hand, these surveys aren't as reliable as

they used to be," said Will Compernolle, macro strategist at FHN

Financial in New York.

Compernolle noted that the data "comes on the back of slower

personal spending that we saw last Friday and a host of other

things that people are looking to for weaker economic activity."

Traders are gauging when the Fed is likely to begin cutting

interest rates as inflation remains above its 2% annual target.

Friday's personal consumption expenditures (PCE) price index

for April showed that price pressures stabilized in the month

while consumer spending slowed, boosting bets that the Fed could

cut rates as soon as September.

Benchmark 10-year note yields fell 11 basis

points to 4.402%, and got as low as 4.392%, the lowest since May

17.

Two-year note yields fell 8 basis points to 4.818%

and reached 4.814%, the lowest since May 20.

The inversion in the two-year, 10-year yield curve

deepened 4 basis points to minus 42 basis points.

This week's main U.S. economic release will be jobs data for

May due on Friday, with May's consumer price inflation report on

June 12 the next major focus.

Other jobs data this week will include the Job Openings and

Labor Turnover Survey (JOLTS) report for April on Tuesday and

the ADP National Employment report for May on Wednesday.

Next week's inflation data will be critical for setting Fed

expectations, and investors will be looking for further signs

that inflation is easing following higher-than-expected readings

in the first quarter.

The Fed will also update its economic and interest rate

projections when it concludes its two-day meeting on June 12.