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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

(Updates yields, adds quotes)

By Tatiana Bautzer and Gertrude Chavez-Dreyfuss

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

sharply on Thursday after data showed deceleration in the

world's largest economy in April, including drops in producer

prices, 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 afternoon trading, the yield on the benchmark U.S.

10-year Treasury note fell 7.9 basis points (bps)

to 4.449%, on track for its largest daily drop since April 24.

The yield on the U.S. 30-year Treasury bond also dipped,

down 5.2 bps at 4.915%, after earlier hitting 5% for

the first time since April 9.

On the shorter end of the curve, the two-year

yield, which typically moves in step with interest rate

expectations, was down 9.2 bps at 3.961%, its biggest one-day

decline in roughly a month.

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."

Walmart ( WMT ), the world's largest retailer, will have to

start raising prices later this month due to the high cost of

tariffs, executives said on Thursday, as the company declined to

provide forecasts for the second quarter. That should further

dampen consumer spending and weigh on retail sales even more.

"We are also seeing changes in jobs growth," added Stan

Shipley, managing director at ISI. Thursday's unemployment

claims report showed requests were stable, but also that job

opportunities are becoming more scarce for those out of work as

economic uncertainty from tariffs discourages businesses from

hiring.

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.

Meanwhile, 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 economic

expectations, was at 48 bps, little changed from Wednesday's

level.

The overall trend remained tilted toward a steeper

curve, with yields on the front end falling faster than those on

the long end as the Fed carries on with its easing cycle.