(Adds analyst comments, details on US economic data, Fed's

Waller's comments, bullets, byline; updates prices)

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Fed's Waller says three or four cuts possible this year

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US retail sales, jobless claims softer than expected

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Philly Fed Index surges, analysts say could be an

aberration

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US 2/10 yield curve flattens slightly

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US rate futures price in 40 bps of easing in 2025

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 16 (Reuters) - U.S. Treasury yields

slipped on Thursday, after trading higher for most of the

session in a choppy market, following comments from Federal

Reserve Governor Christopher Waller who said three or four

interest cuts this year are still possible if U.S. economic data

weakens further.

U.S. rate futures were pricing in about 40 basis points

(bps) of rate cuts in 2025 after Waller's remarks, from about 37

bps late on Wednesday, according to LSEG data. The market also

factored in a 50% chance that the next rate reduction will

likely take place at the Fed's May meeting.

A barrage of data in the world's largest economy showing

weaker-than-expected numbers in retail sales and initial jobless

claims also weighed on Treasury yields as did tame import

prices, which suggested inflation remained stable.

Thursday's reports dampened the U.S. growth outlook and

supported expectations that the Fed will cut rates at least once

this year. Prior to the numbers and Wednesday's soft core

inflation data, some market participants had started to price in

a Fed that will keep rates on hold all year, with a small number

of traders already factoring in a hike.

"Our base case is still two cuts this year and that's

predicated on the notion that we will get some slowing

inflation," said Robert Tipp, chief investment strategist and

head of global bonds at PGIM Fixed Income in New York.

"The Fed will want to cut rates to make sure that the

expansion continues. But even though there would be rate

cuts...I don't think you'll get a big drop in long-term interest

rates because as we have seen in recent months, the yield curve

is normalizing," he added.

Thursday's data showed that U.S. retail sales rose less than

expected in December, up 0.4%, compared with a forecast for a

0.6% increase, although the previous two months were revised

higher. Initial jobless claims, on the other hand, increased to

217,000, after falling in the previous week.

Stan Shipley, managing director and fixed income strategist

at Evercore ISI in New York, said the jobless claims outcome was

"probably due to less than normal seasonal temporary hiring in

November and early December," suggesting there could fewer

seasonal layoffs in early January.

U.S. import prices, meanwhile, barely rose for a third straight

month in December, with the surge in the costs of fuel and food

offset by weakness elsewhere, indicating a tame inflation

outlook. The data matched economists' forecasts.

The lone surprise was the Philadelphia Fed Business Index, which

jumped to 44.3 in January, compared with a forecast of minus 5.

That was the largest increase since April 2021.

Some analysts said the Philly Fed reading could be an

aberrant reading.

In mid-morning trading, the benchmark Treasury 10-year yield

was down 1.8 bps at 4.635%. It was at 4.694% before

the data. On the short end of the curve, the two-year yield,

which reflects interest rate expectations, last traded down 1.1

bps at 4.255%, compared with 4.314% prior to the reports.

The U.S. yield curve, meanwhile, flattened slightly or

reduced its steepness following the economic data, with the

spread between two- and 10-year yields last at 38.2 bps

, compared with 38.5 bps on Wednesday.

The curve briefly steepened after Waller's remarks.

Yield curves typically steepen, tracking an upwardly sloping

shape, in the midst of an easing cycle, as the front end remains

anchored, mirroring rate cuts by the Fed.