Euro zone bond yields ease ahead of key U.S. jobs data

By Linda Pasquini

June 6 (Reuters) - Euro zone bond yields eased ahead of key U.S. jobs data on Friday, a day after they spiked following a signal from the European Central Bank that it may be nearing the end of its rate-cutting cycle.

The ECB cut its deposit rate by 25 basis points to 2% on Thursday, as expected.

However, it dampened prospects of further rate cuts, with ECB President Christine Lagarde saying the central bank was in a "good place", hinting at a potential pause to the easing cycle.

Germany's two-year yield DE2YT=RR, which is sensitive to changes in monetary policy expectations, was down 2.5 bps at 1.85%. Yields on the two-year Schatz rose 8.5 bps on Thursday, marking their largest one-day increase in a month.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, was last down 4 bps at 2.549%.

The spread between the 2-year and 10-year yield, which had reached its narrowest since April 4 in the previous session at 68.20 bps, is now wider at 68.50 bps.

Money market traders have now priced in 24 basis points of easing by year-end and implied about a 17% chance of a rate cut in July, from about 30% before Lagarde's press conference.

"The ECB's scenarios regarding the trade conflict make it clear to us that future interest rate policy is likely to depend heavily on Donald Trump's decisions," analysts at Frankfurt-based Metzler wrote in a note to clients.

The central bank also lowered its inflation and growth projections as the U.S. president's trade war continues to impact the global economy.

TARIFF DISPUTE

"A further escalation in the tariff dispute would weigh on economic growth and at the same time reduce inflationary pressure, which would prompt the ECB to cut interest rates further. If the conflict were to be resolved soon with a positive outcome, however, both growth and inflation would be higher. Further interest rate cuts would then be unlikely," Metzler analysts said.

Later in the day, markets will watch U.S. key payroll numbers closely as a run of soft economic data this week has stoked concerns of a downside surprise in the monthly print, which would add to fears of stagflation while piling pressure on the Federal Reserve to ease policy in a hurry.

In Europe, data on euro zone economic growth for the first quarter will provide details on main growth drivers and employment, while retail sales numbers are expected to give an indication of consumer confidence in the region.

Italy's 10-year yield IT10YT=RR, the benchmark for the euro area periphery, was down 5.6 bps at 3.497%.