The "Powell Risk" lingers, and the "anchor of global asset pricing" may surge at any time

According to the Zhitong Finance APP, in the past few days, following intense debates surrounding the Federal Reserve's monetary policy path shifting hawkish or dovish, as well as potential changes in the Fed leadership, the U.S. Treasury market on Friday recovered some of its weekly losses, while the U.S. dollar, which has been continuously sold off this year, remains on a weakening trajectory. JP Morgan strategists indicated that the uncertainty facing the stock, bond, and currency markets remains high, which could lead to long-term U.S. Treasuries trading at a discount, especially as the yields on long-term U.S. Treasuries of 10 years and above could rise significantly at any time.

The 10-year U.S. Treasury yield, known as the "global pricing anchor," slightly retreated to 4.45% (still up 3 basis points for the week so far), while the longer-term 30-year U.S. Treasury yield is expected to close above 5% for the first time since Monday. Meanwhile, the U.S. dollar index, which measures the strength of the dollar against a basket of major currencies, remains on a downward trajectory, currently down 0.2%, after a Fed official publicly called for a rate cut this month to support the already weakening U.S. labor market.

This week, U.S. Treasuries have experienced significant volatility: persistent inflation pressures due to tariff policies have led traders to even reduce the probability of a rate cut in September, with the 30-year U.S. Treasury yield briefly breaking the important 5% threshold. Since the beginning of the week, U.S. Treasuries and the dollar have been continuously troubled by the "Powell risk": whether U.S. President Donald Trump is about to replace Federal Reserve Chairman Jerome Powell in some manner.

Additionally, the potential expansion of the government budget deficit following the passage of Trump's "Big and Beautiful" plan, combined with the turbulence in government spending expectations brought about by the Japanese Senate elections leading to a significant rise in Japanese long-term government bond yields, has exacerbated the recent upward pressure on U.S. Treasury yields. This is particularly true for the 10-year U.S. Treasury yield, known as the "global asset pricing anchor," and other longer-term U.S. Treasury yields, which could significantly rise at any time, posing a major test for the global stock market, which has been on a strong upward trend and frequently hitting new highs.

"Even if Trump denies that he will replace Powell in the short term, the uncertainty regarding the independence of the Federal Reserve remains high, which could lead to long-term U.S. Treasuries continuing to trade at a discount," wrote Jay Barry's team from JP Morgan in a research report.

At the same time, options traders this week have increasingly hedged against the possibility that the Fed's future rate cuts may occur faster than the market expects, betting that the next Fed chair (whenever they take office) will be more inclined to significantly lower interest rates.

In fact, Christopher Waller, a current Fed governor viewed as a potential successor to Powell, stated that Fed policymakers should collectively support a rate cut this month to support the U.S. labor market, which is showing signs of weakness. This also reflects the significant divergence among the Fed's FOMC voting members regarding the Fed's monetary policy path New York Federal Reserve President John Williams, who has permanent voting rights on the FOMC monetary policy during his term, stated that he expects tariffs to have a greater impact on inflation in the coming months. Therefore, the Federal Reserve's current tightening monetary policy and the path to maintain high interest rates for the long term are "completely appropriate."

Next week, the United States will release housing starts and Purchasing Managers' Index (PMI) data, providing the market with more signals regarding economic growth.

Traders have significantly reduced the probability of two interest rate cuts by the Federal Reserve this year to 75%, whereas just a week ago, the market was fully pricing in a 50 basis point rate cut, and even at one point fully priced in a dovish expectation of three rate cuts totaling 75 basis points this year.

The "CME FedWatch Tool" shows that traders in the interest rate futures market generally tend to believe that the Federal Reserve will cut rates as early as September, with a higher likelihood of action in October (probability over 50%). They are betting that the Federal Reserve may only cut rates once this year, possibly by 25 or 50 basis points, rather than the three cuts totaling 75 basis points that traders were heavily betting on before July