By Sinéad Carew and Nell Mackenzie

NEW YORK/LONDON (Reuters) – MSCI’S global equities gauge lost ground on Friday and U.S. Treasury yields fell after a mixed U.S. jobs report cemented expectations for the Federal Reserve to lower interest rate this month, but left investors uncertain about the size of the cut.

The Labor Department reported that U.S. employment increased less than expected in August while the jobless rate dropped in line with expectations to 4.2% from 4.3% in July, suggesting an orderly slowdown.

Non-farm payrolls rose by 142,000 in August, short of the 160,000 growth economists polled by Reuters had expected while July numbers were revised down to 89,000 from 114,000.

“It just looks like things are slowing down a bit, not like something cataclysmic is imminent,” said Matt Rowe, head of portfolio management, cross asset strategies at Nomura Capital Management in New York. “What the market’s going to get out of this is clear cover for the Fed to be cutting rates and a path to cutting rates more than once.”

After the report, traders bet on a 63% probability that the Fed would cut rates by 25 basis points this month versus 60% on Thursday, while bets on a 50 basis point cut edged down to 37% from 40% the day before, CME Group’s FedWatch tool showed.

Federal Reserve Bank of New York President John Williams said on Friday he favors cutting rates but was not inclined to offer a view on how big the Fed’s first move should be.

Wall Street indexes opened higher after the news but gradually declined into the late morning.

At 11:39 a.m. ET, the Dow Jones Industrial Average fell 337.59 points, or 0.83%, to 40,418.16, the S&P 500 lost 80.87 points, or 1.47%, at 5,422.55 and the Nasdaq Composite dropped 392.48 points, or 2.29%, to 16,735.18.

MSCI’s gauge of stocks across the globe fell 9.39 points, or 1.16%, to 803.28 while Europe’s STOXX 600 index fell 1.15%.

Germany’s DAX index fell 1.4% after data showed the country’s industrial production fell 2.4% in July, compared with analyst expectations for a 0.3% drop.

In the bond market, benchmark 10-year Treasury yields were down after the payrolls report but came off of a 15-month low.

“The market’s really struggling with this one because it’s really in the middle of what could be used as a justification for either a 25 or 50 basis point rate cut,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

The yield on benchmark U.S. 10-year notes fell 4.9 basis points to 3.684%, from 3.733% late on Thursday.

The 2-year note yield, which typically moves in step with interest rate expectations, fell 7.7 basis points to 3.6751% from 3.752% late on Thursday.

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 positive 0.7 basis points.

In currencies, the dollar index edged up in volatile trading with focus on the steady slowdown in the labor market suggesting more rate cuts after September.

“A half-point rate cut at the central bank’s September meeting remains unlikely, but today’s release provided clear evidence of a sharp deterioration in labor market fundamentals, and will bolster bets on at least one jumbo-sized rate cut in the coming months,” said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, gained 0.09% at 101.13.

The euro was down 0.17% at $1.1092 but against the Japanese yen, the dollar weakened 0.77% to 142.34.

In energy markets, oil prices lost ground after the payrolls report and were on track for a steep weekly loss as demand concerns outweighed delayed supply increases by OPEC+ producers.

U.S. crude lost 1.63% at $68.02 a barrel and Brent fell to $71.5 per barrel, down 1.64% on the day.

In precious metals, gold prices eased from near-record levels earlier in the session.

Spot gold dropped 0.25% to $2,510.13 an ounce. U.S. gold futures fell 0.13% to $2,508.10 an ounce.

(Reporting by Sinéad Carew, Karen Brettell, Saqib Iqbal Ahmed, Nell Mackenzie and Stella Qiu; Editing by Sam Holmes, Mark Potter, Alexander Smith and Richard Chang)

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