(In Aug 15 story, corrects typo in firm name in paragraph 10 to

"+" from "&")

By Alden Bentley

NEW YORK, Aug 15 (Reuters) - U.S. Treasury yields surged

on Thursday after strong economic data all but eliminated fears

about a hard economic landing and curtailed expectations that an

aggressive Federal Reserve easing was coming next month.

The Commerce Department said retail sales rose 1.0% last

month after a downwardly revised 0.2% drop in June. Economists

polled by Reuters had forecast retail sales advancing 0.3% after

they were initially reported as unchanged in the previous month.

Also out was news that 227,000 Americans filed for

unemployment benefits last week, fewer than the 235,000 expected

and the upwardly revised 233,000 claims the prior week.

The data restored confidence that was jolted by a

surprisingly weak employment report a couple of weeks ago, and

reinforced a picture of improving inflation from July Producer

Price Index and Consumer Price Index releases this week.

"This will take 50 basis points in September off the table.

(I) still think that 25 basis points make sense, just because

inflation continues to ease and we got a couple of good reports,

PPI and CPI adding to that," said Steve Wyett, chief investment

strategist at Bok Financial in Tulsa, Oklahoma.

"We have the all-important employment data before the next

Fed meeting, but this should reduce the feelings that the

economy is imminently going into a recession."

Thursday's rise in the two-year note yield looked set to be

the biggest daily jump in about four months. The 10-year yield

initially was tracking to its biggest basis point gain in weeks

before paring slightly.

"While it's pretty large for a one-day move, in the context

of the move lower in yields over the most recent period here,

it's really just a little bit of a giveback, and to us makes

sense," said Scott Pike, senior portfolio manager at Income

Research + Management in Boston.

Subsequent news that July U.S. industrial production fell

0.6%, more than the 0.3% fall expected, barely affected the

yield trajectories, since manufacturing is a smaller part of the

economy than the 70% made up by the consumer.

Divided sentiment since the Aug. 2 jump in July's

unemployment rate to 4.3% between traders betting on a 50 basis

point cut out of the Sept. 17-18 Federal Open Market Committee

meeting and a more cautious 25 bps cut has resolved for now,

favoring the latter.

Fed funds futures indicate traders see the odds of a

25 bps cut in the 5.25%-5.5% policy rate at about 76%, up from

65% late Wednesday, according to LSEG calculations.

Meanwhile St. Louis Fed President Alberto Musalem and

Atlanta Fed President Raphael Bostic on Thursday lined up behind

the possibility of an interest rate cut at the U.S. central

bank's policy meeting next month, reversing their previous

skepticism about lowering borrowing costs too soon.

"Now that inflation is coming into range, we have to look at

the other side of the mandate, and there, we've seen the

unemployment rate rise considerably off of its lows," Bostic

said in an interview with the Financial Times.

"But it does have me thinking about what the appropriate

timing is, and so I'm open to something happening in terms of us

moving before the fourth quarter."

The yield on the benchmark U.S. 10-year note

rose 10.6 basis points to 3.928%, wrapping up with the biggest

absolute gain in a week.

The 2-year note yield, which typically moves in

step with interest rate expectations, reached its highest since

Aug. 2, and was last up 15.9 basis points at 4.1055%, which

would be the biggest since a 22.2 bp surge on April 10.

The 30-year bond yield rose 7.7 basis points

from late Wednesday to 4.1856%.

The closely watched gap between yields on two- and 10-year

Treasury notes, considered a gauge of growth

expectations, was at negative 18 bps, deepening an inversion

from its late Wednesday reading of negative 12.8 bps.

An inverted yield curve is generally seen as pointing to a

recession. Last week, hopes of an aggressive 50 bps Fed easing

in September to counter a slowdown briefly shifted the gap

between 2- and 10-year yields to a positive 1.5 bps, the first

time the curve had a more normal upward slope since July 2022.