(Adds details on data and analyst quote, updates yields)

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US producer prices fell on monthly basis in April

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US April retail sales edge up

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US factory output drops 0.4%

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US rate futures bet Fed will cut rates in September

By Tatiana Bautzer

NEW YORK, May 15 (Reuters) - U.S. Treasury yields fell

on Thursday after data showed some deceleration in the world's

largest economy in April, including drops in producer prices and

manufacturing output and a slowdown in retail sales.

The reports suggested the Federal Reserve was on track to

cut interest rates at least twice this year.

In mid-morning trading, the yield on the benchmark U.S.

10-year Treasury note was down 4.1 basis points

(bps) after hitting a six-week high of 4.55% overnight.

The two-year U.S. Treasury yield, which

typically moves in step with interest rate expectations, fell

6.7 bps to 3.986%.

Yields retreated after the release of data that showed U.S.

producer prices unexpectedly fell in April, with the index for

final demand dropping 0.5% after an upwardly revised unchanged

reading in March.

Economists polled by Reuters had forecast the PPI would rise

0.2%.

"Clearly, companies absorbed a big chunk of tariff

increases," Chris Low, chief economist at FHN Financial, said in

emailed comments. "Whether they will continue to do so, or will

try to pass them on as price increases, remains to be seen."

At the same time, U.S. factory output slid more than expected,

down 0.4% last month after an upwardly revised 0.4% gain in

March. Economists polled by Reuters had forecast production

would slip 0.2% after a previously reported 0.3% rise.

U.S. retail sales, on the other hand, were mixed, with the

headline figure edging up 0.1% after an upwardly revised 1.7%

jump in March.

But core retail sales, which exclude automobiles, gasoline,

building materials and food services, fell 0.2% in April after

an upwardly revised 0.5% gain in March. This measure corresponds

most closely with the consumer spending component of gross

domestic product.

"The fall in core retail sales was surprising and is

helping push yields down," said Vail Hartman, a rates strategist

at BMO Capital Markets in New York. "That's a discouraging start

to the second quarter."

The overall data on Thursday reinforced bets on two

interest rate cuts by the Fed, with a roughly 75% chance that

the easing would begin in September, according to CME Group's

FedWatch tool.

A closely-watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of the economic

outlook, steepened to 49.9 bps, reflecting investor expectations

of more Fed rate cuts.