* U.S. rates futures rise on weak January jobs data
* Traders see less chance of July 2015 rate increase-CME
* Fed rate hike view pushed out to third-quarter 2015
By Richard Leong
NEW YORK, Feb 7 U.S. short-term interest rates futures rose on Friday, erasing earlier losses, after a much weaker-than-expected U.S. payrolls report for January raised expectations the Federal Reserve would leave policy rates near zero for longer than previously thought.
The U.S. Labor Department said domestic employers added 113,000 workers last month, fewer than the 185,000 forecast of analysts polled by Reuters. The jobless rate dipped to 6.6 percent from December's 6.7 percent, as expected.
Some traders had speculated about a hiring rebound in January after a surprisingly small payroll gain in December.
"It was a huge disappointment to traders who were short," said Alex Manzara, vice president of institutional sales at R.J. O'Brien and Associates in Chicago.
The rise in federal funds futures suggested traders reckoned it is less likely that the U.S. central bank would hike the overnight interbank rate at its July 2015 policy meeting. They now expected a rate hike would more likely occur in the third quarter of 2015.
Eurodollar futures, which gauge traders' expectation on funding costs between banks, turned higher in the wake of the unexpectedly weak January payroll figure. Eurodollar contracts for delivery in 2016 to 2019 were up anywhere from 5 basis points to 7.5 basis points.
While the latest payrolls report cooled expectations for a Fed rate hike in the first half of 2015, it was not enough to reset the outlook on the Fed's planned end of its bond-purchase stimulus this year.
Dallas Fed President Richard Fisher downplayed the role of the January jobs data in causing the central bank to slow its tapering of its third round of quantitative easing. The Fed cut its monthly purchases of Treasuries and mortgage-backed securities to $65 billion in February, down $10 billion from January. It first began tapering last month with a $10 billion reduction to $75 billion.
The July 2015 fed funds contract last traded at 99.705, up 1.5 basis points from Thursday's close. It erased an earlier decline of 1.5 basis points before the release of the government's January jobs data.
This implied traders see a 53 percent chance of the Fed raising the fed funds rate, which it influences through open market operations, at its July 2015 policy meeting, according to CME Group's FedWatch program which calculates the traders' expectations on changes to the Fed's policy rate.
Their outlook of a July 2015 rate increase briefly fell to 49 percent before retracing higher.
The implied probability of a July 2015 rate hike was 58 percent on Thursday.
In the meantime, the Sept 2015 fed funds contract was up 3 basis points at 99.615. This suggested a 65 percent chance of a Fed rate hike, down from 69 percent on Thursday.
WORLD NEWS SCHEDULE AT 1800 GMT/2 PM ET
Iraqi forces free hundreds of civilians in Mosul Old City battles as death toll mounts