TREASURIES-Yields edge lower before Tuesday's US consumer price report

By Karen Brettell

Aug 11 (Reuters) - U.S. Treasury yields edged lower on Monday, with no major news or economic data driving trading ahead of Tuesday's highly anticipated July consumer price inflation report.

Traders are pricing in 86% odds that the Federal Reserve will cut interest rates at its next meeting in September, following news on Monday that employers in July added fewer jobs than expected, while job gains for previous months were also revised sharply lower. However, the prospect of a renewed inflation uptick is seen complicating the interest-rate outlook.

Fed Chair Jerome Powell has said that he anticipates prices to rise this summer due to U.S. President Donald Trump's tariff policies.

Weakening consumer sentiment, however, would likely dent inflation increases, said Thomas Simons, chief U.S. economist at Jefferies in New York.

"I don't understand how we can have this mentality that the consumer is completely tapped out and not able to continue to drive growth, but at the same time that pricing power is going to be maintained on both the goods and services side."

"My view is more that if we do have tariff-driven inflation that pushes goods prices up, that's going to reduce demand for something else, whether that's other goods or services," he added. "And thus, the pricing power is going to be weakened, and we'll see some offsetting declines in prices that limits the overall inflation pressure."

Economists polled by Reuters expect that headline inflation rose 0.2% in July for an annual gain of 2.8%, with core prices up 0.3% for an annual increase of 3.0%. USCPI=ECI, USCPNY=ECI, USCPF=ECI, USCPFY=ECI

The benchmark U.S. 10-year note yield US10YT=RR fell 1.2 basis points to 4.271%. The 2-year note US2YT=RR yield fell 0.6 basis points to 3.752%.

The yield curve between two-year and 10-year notes flattened by around half a basis point to 51.5 basis points. US2US10=TWEB

Trump has signed an executive order extending a pause in sharply higher U.S. tariffs on Chinese imports for another 90 days, a White House official said on Monday.

Longer-term U.S. Treasury yields are expected to rise modestly in coming months on tariff inflation worries and a deluge of new debt issuance even as short-term yields fall on renewed Fed rate cut bets, a Reuters survey of bond strategists showed.

Traders also focused on who Trump will nominate to replace Fed Chair Powell when his term ends in May.

Bloomberg News reported on Monday that Trump has expanded his search to include two Fed vice chairs, Michelle Bowman and Philip Jefferson, and Dallas Fed President Lorie Logan.

Trump is also due to meet with Russian President Vladimir Putin on Friday to discuss an end to the Russia-Ukraine war.

Ukrainian President Volodymyr Zelenskiy said Russia was preparing its troops for new offensives instead of getting ready to stop the war in Ukraine.