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NEW YORK, Oct 4 (Reuters) - September's moderate uptick in U.S. job growth drove the Treasury yield curve slightly flatter on Friday morning, but the move was not big enough to reverse the fall in short-dated yields this week to two-year lows on evidence of a slowdown in the national manufacturing and services sectors.
In addition to steady job growth, the Labor Department reported the unemployment rate dropping to near a 50-year low of 3.5%, easing some market concerns about an imminent recession. However, the monthly report also showed wage growth stagnating and manufacturing payrolls declining for the first time in six months, evidence that the economic softness induced by the U.S.-China trade war has begun to spread to the labor market.
The report came on the heels of a string of weak economic reports, including a plunge in manufacturing activity to more than a 10-year low in September and a sharp slowdown in services industry growth to levels last seen in 2016. These reports earlier this week sent the two-year Treasury yield, a proxy for investor expectations of moves in interest-rate policy, to its lowest level since September 2017.
The two-year yield was last trading up 2 basis points to 1.406% but remained down 22 basis points this week.
"I think that the overall picture confirms the gentle slowdown in the economy that is already priced into the bond market," said Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research.
"It's pretty consistent with what we saw with the PMIs, the ISMs The drop in the manufacturing payrolls was a confirmation of softness in there."
The benchmark 10-year yield was down 1.2 basis points to 1.524%, pushing down the spread between the two- and 10-year yields to 11.8 basis points. The spread - the traditional measure of the yield curve - was 14.2 basis points at last close, almost 10 basis points higher than where it began the week.
"All in all, it's not probably a big mover for the bond market, but it does leave the likelihood of a Fed rate cut on the table perhaps in October, perhaps theyll decide upon it in December and get more data," said Jones.
Expectations the Federal Reserve will cut rates later this month by 25 basis points from its current target rate of 1.75%-2.0% were at 79.6% on Friday, lower than the 88.7% on Thursday, but still a significant increase from 39.6% on Monday, according to CME Group's FedWatch tool. (Reporting by Kate Duguid Editing by Nick Zieminski)