Invesco: Expects the Federal Reserve to cut interest rates twice before the end of the year, and U.S. Treasury yields may continue to remain low

According to the Zhitong Finance APP, Zhao Yaoting, a global market strategist at Invesco Asia Pacific, indicated that the U.S. inflation data for July met expectations, and the not overly hot CPI data alleviated investors' concerns that President Trump's tariff policies might drive up inflation. Invesco maintains its basic expectation that the Federal Reserve will implement two rate cuts by the end of this year, each by 25 basis points, but believes that U.S. Treasury yields may continue to remain low.

Although Federal Reserve Chairman Jerome Powell stated at the July Federal Open Market Committee press conference that a wait-and-see approach is reasonable, this mild inflation data, coupled with last month's weak employment data, provides support for easing monetary policy. The market will closely watch Powell's keynote speech this week at the Jackson Hole symposium, which has traditionally been seen as an indicator of the Federal Reserve's policy direction in the coming months.

Zhao Yaoting pointed out that the expectation of rate cuts should have driven long-term U.S. Treasury yields down, but the reality has been different. Instead, since the release of the July CPI data, the U.S. Treasury yield curve has become steeper. This "twisting steepening," where short-term yields decline and long-term yields rise, is largely due to Trump's statements on social media and the impact on Powell's position.

When the media first reported in July that Trump suggested replacing Powell, a similar twisting steepening situation was already observed. Powell still has the possibility of completing his remaining term until May 2026 when his term ends. However, recent market reactions to Trump's escalating criticism of the Federal Reserve Chairman indicate that if Powell were indeed replaced, market risks would increase.

Meanwhile, after suddenly firing Erika McEntarfer, Trump appointed E.J. Antoni to lead the U.S. Bureau of Labor Statistics (BLS), raising market doubts about whether the historical independence of the Federal Reserve still exists, further disrupting the market. The BLS significantly influences monetary policy by releasing key data such as employment and inflation. Concerns about political interference in the BLS's data releases could also undermine market confidence in long-term U.S. Treasuries.

Even if the Federal Reserve resumes rate cuts later this year, long-term U.S. Treasury yields may still rise, especially if the rate cuts are less than the approximately 125 basis points currently priced in by the money market. A similar situation occurred last year: the Federal Reserve only cut rates by 100 basis points, while the market expected cuts close to 200 basis points, pushing the yield on the 10-year U.S. Treasury from about 3.7% in September last year to about 4.6% at the end of last year. There is no compelling reason to overweight the long end of the U.S. Treasury yield curve