TREASURIES-US Treasury yields rise as inflation data points to smaller rate cut

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PCE price index rose 0.2% in July, matching expectations

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Consumer spending rose 0.5% in July

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Market focus shifts towards jobs and labor over inflation

(Updated at 2:17 p.m. ET/1817 GMT)

By Chuck Mikolajczak

NEW YORK, Aug 30 (Reuters) - U.S. Treasury yields advanced on Friday, with the benchmark 10-year note set to snap a two-week streak of declines, after economic data raised expectations the Federal Reserve was likely to opt for a small rate cut at its September meeting.

The Commerce Department said the personal consumption expenditures (PCE) price index rose 0.2% last month, matching expectations of economists polled by Reuters, after an unrevised 0.1% gain in June. In the 12 months through July, the PCE price index increased 2.5%, matching June's gain.

"Income and spending were a little better than expected while inflation was in line with expectations. This can reinforce the idea that the Fed has stuck the landing," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month, also meeting expectations, after advancing by an unrevised 0.3% in June to show a strong economy early in the third quarter.

"The market's focus is shifting more towards jobs and labor rather than inflation. It feels like the market's pretty well convinced that inflation is moving in the right direction," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin, Texas.

"As long as it continues to move in that direction, then the focus is going to be on growth and in the job market."

The U.S. 10-year Treasury note yield rose 3.8 basis points to 3.905%, on track for its fifth straight daily gain and first weekly rise in three. However, the yield was still on course for fourth straight monthly decline.

Markets are fully pricing in a rate cut of at least 25 basis points at the Fed's mid-September meeting. Expectations for a 50 basis point cut dipped to 30.5% after the data, however, from 34% on Thursday, CME's FedWatch Tool showed.

The 30-year bond yield climbed 4.4 basis points to 4.196%. The yield was set to snap a two-week streak of declines but was also poised for a fourth straight monthly drop.

Fed Chair Powell last week flagged the cooling in the labor market, which signaled a shift in the Fed's focus towards the job market over fighting inflation.

A survey from the University of Michigan showed consumer sentiment edged up to 67.9 in August from July's eight-month low of 66.4, snapping a four-month slide, while inflation is expected to continue to moderate.

A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year Treasury notes , seen as an indicator of economic expectations, was at a negative 2 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 3.2 basis points to 3.925%. The yield was barely higher on the week but set for a fourth consecutive monthly decline.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.046% after closing at 2.057% on Aug. 29.

The 10-year TIPS breakeven rate was last at 2.154%, indicating the market sees inflation averaging about 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; editing by Barbara Lewis and Richard Chang)