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TREASURIES-Yields rise on strong European data, ahead of Fed's Powell

Karen Brettell

* German business data improves

* U.S. jobless claims drop in latest week

* Fed's Powell to speak on Friday

NEW YORK, Aug 22 (Reuters) - Treasury yields rose on Thursday after better than expected manufacturing data in Europe boosted risk sentiment, and as investors waited on a speech by Federal Reserve chairman Jerome Powell on Friday. Euro zone business growth picked up a touch in August, helped by brisk services activity and as manufacturing contracted at a slower pace. Still, trade war fears knocked future expectations to their weakest in over six years.

We had good data in Europe, some of the manufacturing PMIs are coming off the bottom and were better than expected, that set the tone coming into the morning, said Tom Simons, a money market economist at Jefferies in New York. U.S. data also showed that the number of Americans filing applications for unemployment benefits fell sharply last week, suggesting the labor market was holding firm despite a manufacturing slowdown and concerns the economy is on a path toward recession.

Benchmark 10-year notes were down 9/32 in price

to yield 1.606%, up from 1.577% late on Wednesday. Fed policy is in focus as investors evaluate the likelihood that the U.S. central bank will cut rates when it meets next month. The Fed cut rates by 25 basis points at the close of its July 30-31 meeting, with minutes for the meeting published on Wednesday showing broad concern among policymakers over a global economic slowdown, trade tensions and sluggish inflation. Policymakers were divided on cutting rates in July, however, despite being united in wanting to avoid the appearance of being on the path to further rate cuts. The bond market has priced in a far more bearish picture on the economy since the Feds July meeting. The two-year, 10-year yield curve inverted last week for the first time since 2007, a signal that a recession is likely in one to two years. The curve also briefly inverted on Wednesday after the Fed minutes were released.

The curve was last one basis point.

Interest rate futures traders are pricing in a 96% probability of a rate cut at the Fed's September meeting, a 64% chance of an additional cut in October, and a 39% likelihood of another cut in December, according to the CME Group's FedWatch tool.

(Editing by David Gregorio)