TREASURIES-US yields slightly lower, eyes on China trade talks for inflation clues

By Tatiana Bautzer

NEW YORK, May 30 (Reuters) - U.S. Treasury yields were little changed to marginally lower on Friday in choppy trading, after data showed inflation was in line with expectations last month and traders focused on the trade talks between the U.S. and China.

Consumer spending slowed, suggesting the Federal Reserve remained on track to cut interest rates this year, but investors' predictions were made harder by a potentially souring U.S.-China relationship. President Donald Trump said in a social media post on Friday that China had 'totally violated' terms of its tariff agreement with the U.S.

The outcome of the negotiations with China is key to gauging future inflationary pressures.

In mid-morning trading, the two-year yield, which tracks interest rate expectations, was slightly down at 3.935% US2YT=RR, while the benchmark 10-year yield inched lower to 4.414% US10YT=RR.

Friday's data showed the Personal Consumption Expenditures Price index (PCE) rose 0.1% in April compared with a 0.1% increase expected by economists polled by Reuters. Annually, it stood at 2.1% against estimates of 2.2%.

Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.2% last month after an unrevised 0.7% jump in March.

"The economic data this morning is supportive and positive but the market overall is still trying to sort out where we are in the trade war.", said Art Hogan, chief market strategist with B. Riley Wealth in Boston.

"We went from a place where it felt as though investors had a pretty good handle on the direction of trade and tariffs, and now that picture has become very confusing," he added.

A U.S. trade court on Wednesday blocked most of Trump's tariffs from going into effect in a sweeping ruling that the president overstepped his authority. They were temporarily reinstated by a federal appeals court on Thursday, further muddling the economy's outlook.

Future markets continue to predict the first rate cut by the Federal Reserve's Open Market Committee at its September meeting, according to CME's FedWatch tool.