LONDON, April 6 (Reuters) - Euro area yields were steady on Thursday after upbeat industrial data from Germany, but remained close to 10-day lows hit after a string of soft U.S. data added to expectations that the Federal Reserve could soon pause its interest rate hiking cycle.
German industrial production rose significantly more than expected in February, due in part to vehicle manufacturing, the federal statistical office said.
"This week's batch of hard economic data for February shows a strong comeback for German industry," said ING global head of macro Carsten Brzeski.
"Today's industrial production data are a welcome sign of relief and evidence that German industry is more resilient than often feared," Brzeski added, saying the data takes away the risk of a technical recession.
Germany's 10-year yield, the benchmark for the euro area, was little changed at 2.176%. Yields move inversely to prices.
The two-year yield, the most sensitive to changes in interest rate expectations, was flat at 2.507%.
Market expectations for the European Central Bank (ECB) terminal rate stood just under 3.5%, with the September 2023 ECB euro short-term rate (ESTR) forward at 3.36%, implying an ECB deposit rate of 3.46%.
The November forward peaked above 4% in March, before troubles emerged at U.S. tech lender Silicon Valley Bank.
Italy's 10-year yield rose stood at 4.019%, keeping the closely watched gap between German and Italian 10-year yields steady at around 183 bps.
SOFT U.S. DATA
A survey released on Wednesday showed the U.S. services sector slowed more than expected in March as demand cooled, while a measure of prices paid by services businesses fell to the lowest in nearly three years.
Meanwhile, private employers hired far fewer workers than expected in March, the ADP National Employment report showed on Wednesday.
The softer data adds to evidence that Fed tightening is "starting to have real traction on the economy," said Richard Carter, head of fixed interest research at Quilter Cheviot.
"Central banks, including the ECB, are getting closer to the peak in rates," he said.
Friday's keenly eyed nonfarm payrolls report, when many markets are closed globally, will be the next data set that is likely to have an impact on the outlook for central bank policy.
"As we reach the end of the hiking cycle, market participants will be looking at every data point in minute detail in order to validate that a pause in rate hikes is imminent," Quilter Cheviot's Carter said.
Traders are pricing in a pause in rate hikes as the most likely outcome at the Fed's meeting next month, with around 75 basis points (bps) worth of interest rate cuts priced by the end of the year, although some analysts think this may be too aggressive.
"The Fed will need to see substantial progress on core inflation moving down to 2% before it even considers rate cuts and, hence, policy rates will likely remain at their peak for longer than markets are now expecting," UniCredit analysts said in a note. (Reporting by Samuel Indyk; Editing by Conor Humphries)
