Euro zone bond yields ease ahead of key US 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, but it dampened prospects of further rate cuts with ECB President Christine Lagarde saying the 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 3 bps at 1.845%. Yields on the two-year Schatz rose 8.5 bps on Thursday, marking their largest one-day increase in a month.

There was probably some element of pullback in terms of market players maybe thinking Thursday's move went marginally too far, noted Lyn Graham-Taylor, senior rates strategist at Rabobank.

He also pointed to rather weaker-than-expected French and German industrial production prints earlier in the session.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, was last down 5 bps at 2.539%.

The spread between the two- and 10-year yields was at 68.80 bps, hovering close to its narrowest since April 4 at 68.20 bps, which it hit the previous day.

Money market traders have now priced in 24 basis points of easing by year-end and implied about a 18% chance of a rate cut in July, from about 30% before Lagarde's press conference.

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

"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.

If the European economy weakens further then the central bank might cut interest rates again, policymaker Yannis Stournaras told Bloomberg TV in an interview on Friday, adding that "this is not expected."

US PAYROLLS

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 feed fears of stagflation while piling pressure on the Federal Reserve to ease policy in a hurry.

"There are some hints of a slowdown in the labour market. So it will be interesting to see if this is backed up with the headline payrolls number today," Rabobank's Graham-Taylor said.

In Europe, stronger-than-expected revised numbers for economic growth for the euro zone in the first quarter and retail sales data drew hardly any reaction from the bond markets.

Italy's 10-year yield IT10YT=RR, the benchmark for the euro area periphery, was down 7 bps at 3.48%.