U.S. Treasury yield warning: Tonight's CPI may exceed expectations, Wall Street bets on two rate cuts by the Fed within the year

The U.S. CPI for July will be released on Tuesday at 20:30 Beijing time. This latest inflation data will provide clues for bond traders betting on a Fed rate cut in September, in order to understand how President Trump's tariff policy is impacting inflation. Wall Street economists expect the U.S. CPI for July to rise by 2.8% year-on-year, higher than June's 2.7%. The core CPI for July, excluding food and energy prices, is expected to rise by 3% year-on-year, higher than June's 2.9%; and is expected to increase by 0.3% month-on-month, higher than June's 0.2%. After signs of weakening in the U.S. job market, expectations for a Fed rate cut in September quickly rose in the market. Futures trading shows that investors are betting on the Fed cutting rates twice by 25 basis points before the end of the year. Some investors are even betting on a significant 50 basis points rate cut in September. With the expectations of rate cuts driving down, U.S. bond yields have fallen to levels not seen since late April. The CME Group's FedWatch Tool shows that the probability of a 25 basis points rate cut by the Fed in September is at 86.5%, the probability of cumulative 50 basis points rate cuts by October is at 53.6%, and the probability of cumulative 50 basis points rate cuts by December is at 43.6%. However, market participants hoping for a Fed rate cut in September may face the key obstacle of inflation. Reports from Bank of America, Apollo Global Management, and BNY Mellon have all listed stagnant inflation as a major concern. Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, said, "The market is looking for further evidence that changes in tariff policy are translating into increased goods inflation. Increased inflation, all else equal, may mean that the Fed may need to see more data before cutting rates." George Catrambone, head of fixed income at DWS Americas, said that if inflation continues to rise in July, it may create a conflict for the Fed's dual mandate of stable employment and inflation, and policymakers must consider the U.S. PPI for July to be released on Thursday and the U.S. CPI for August before the rate decision in September. Persistent high inflation and sluggish economic growth also pose risks for the U.S. dollar. The dollar has already fallen by nearly 8% against a basket of currencies so far this year. Gennadiy Goldberg added that in a situation of stagnant inflation, economic slowdown could be further exacerbated. Stubborn inflation could weaken the Fed's ability to cut rates in the future, and might also push U.S. bond yields higher. Last week, a series of weak U.S. bond auctions reflected reduced investor demand for U.S. bonds before the July CPI release, causing bond yields to briefly rise. Following the Fed's decision to keep rates unchanged last month, Fed Chair Powell reiterated that officials needed more time to assess the impact of tariffs before cutting rates. However, Fed governors Waller and Bowman, appointed by Trump, have differing views, supporting immediate rate cuts due to a weak labor market. Additionally, Trump's nomination of his economic advisor Stephen Moore to replace the previously announced resignation of Kudlow as a Fed governor may add another dovish official to the Fed. Michael Feroli, chief U.S. economist at JPMorgan, said that if Moore is approved as a Fed governor before the September rate decision meeting, there could be at least three dissenting votes against keeping rates unchanged. He said, "For Powell, risk management at the next rate decision meeting may not just be about balancing employment and inflation risks. We now believe the path of least resistance is to bring the next 25 basis points rate cut forward to September." Cameron Crise, strategist at Bloomberg, said, "The market is still pricing in almost two rate cuts this year, not three. While a rate cut in September is almost a done deal, significant change in these expectations may require not only unexpected increase in inflation data on Tuesday, but also unexpected increase in non-farm payroll data for August on September 5." However, despite forecasts showing inflation rates staying above the Fed's 2% target, Roger Hallam, global head of rates at Vanguard Asset Management, expects policymakers to focus on signs of a weak job market unless there is a significant inflationary shock. He said, "At critical moments, the Fed will prioritize the job market under non-extreme inflation scenarios. The labor market has shown enough signs of weakness, and the probability of a rate cut in September has risen significantly."