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