Manufacturing, claims data support steady rates

By Lucia Mutikani

NEW YORK (Reuters) - Manufacturing activity in the U.S. Mid-Atlantic region accelerated in May, while new claims for jobless benefits unexpectedly fell last week, suggesting the economy might not be braking as sharply as initially thought.

The reports released on Thursday backed views that the Federal Reserve would probably keep interest rates unchanged in the near term. But a fall in a gauge of future economic activity was a reminder that the world's largest economy is slowing down.

The Federal Reserve Bank of Philadelphia said its business activity index was at 4.2 in May, up from 0.2 in April and beating Wall Street's forecast for a 3.O reading. May's reading was the highest since January, when it was at 8.3.

Any reading above zero indicates growth in the region's manufacturing sector. The index was above zero for the fifth straight month. The new orders index, a gauge of future growth, rose to 8.7 in May from 2.8 in April.

"The overall index was marginally stronger than expected, but key indicators like orders and employment showed decent increases that will further support the view that a bottom in the manufacturing slowdown has already been seen," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

Government bonds extended losses, which were triggered by the report showing a surprising drop in the number of new claims for jobless benefits, with yields on benchmark 10-year notes US10YT=RR rising to their highest level since mid-April.

The data propelled the dollar close to a three-month high against the yen JPY=, while the euro EUR= traded down 0.2 percent at $1.3495, almost 2 cents below a record peak struck last month. U.S. rate futures trimmed the chances for Federal Reserve interest rate cuts this year.

DATA DO NOT JUSTIFY A RATE CUT

Initial filings for state unemployment insurance aid fell for the fifth straight week to the lowest level since mid-January, while a less volatile measure of the labor market fell to its lowest in more than a year.

The number of new claims filed dropped 5,000 to a seasonally adjusted 293,000 in the week ended May 12 from a revised 298,000 for the previous week, the Labor Department said.

The four-week moving average of claims, which smoothes weekly volatility to provide a better sense of underlying job-market trends, fell for the third consecutive week, dropping to 305,500 from 317,500 in the previous week and to its lowest since April 2006.

"All in all, recent claims numbers and other data do not indicate broad-based enough economic weakness to justify a rate cut in June, and we have now officially moved (our forecast for) the first rate cut back to August from June," said William O'Donnell, head of interest rate strategy at UBS in Stamford, Connecticut.

The drop in jobless claims was seen boosting the forecast for the next payrolls figure, analysts said. Many believe the Fed will not cut interest rates until it sees signs of stress in the labor market.

"The last few have shown fewer than 100,000 new jobs and this should get us back above that," said Tim Mazanec, senior currency strategist for Investors Bank & Trust in Boston.

The U.S. economy added a modest 88,000 jobs in April, the slimmest gain in more than two years, the Labor Department reported in its monthly data released on May 4.