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[Quick Facts]

1. Bank of Canada raises rates again, and there may be more to come.

2. Timiraos says July may be the "final chapter" of Fed rate hikes.

3. Beige Book shows slower inflation in many regions and expects decelerating economic growth.

4. June CPI can't change expectations for a July rate hike.

[News Details]

Bank of Canada raises rates again, and there may be more to come

Following the resumption of interest rate increases in early June, the Bank of Canada (BoC) again raised interest rates by 25 basis points to 5% on July 12, hitting the highest level since April 2001 in Canada.

This rate hike was widely expected in the market. The Bank of Canada said that the rate hike decision was made because excess demand and high core inflation were showing signs of persisting longer, while it also took into account the revision of the outlook for economic activity and inflation.

According to the BoC, strong demand and a tight labor market have led to continued inflationary pressures in the service sector. At the same time, the economy remains stronger than expected and excess demand persists. The real estate market has picked up. Labor supply, while more plentiful, remains tight, with payrolls rising by about 4% to 5%.

The BoC forecasts that the interest rate hike will result in a slowdown in Canada's economic growth, which will average about 1% in the second half of this year and the first half of next year, implying real GDP growth of 1.8% and 1.2% this year and next year, respectively. The economy will be in moderate oversupply early next year before growth picks up to 2.4% in 2025.

The BoC's monetary policy report, released on the same day, forecasts that inflation will remain around 3% next year and gradually fall back to the 2% target by mid-2025. This progress is slower than previously forecast.

We are prepared to raise the policy rate further if new information suggests we need to take more action, BoC Governor Tiff Macklem said at a news conference.

Timiraos says July may be the "final chapter" of Fed rate hikes

Inflation fell to its lowest level in more than two years in June, giving Americans relief from painful price increases and increasing the likelihood that the Federal Reserve will stop raising interest rates after a rate hike this month, Nick Timiraos, a Wall Street Journal correspondent responsible for covering the Federal Reserve, said in his latest article.

Investors cheered the data, which affirmed that the Fed is making progress in curbing high inflation, Timiraos said.

He expected Fed officials to raise rates further at their July 25-26 meeting, bringing the policy rate to its highest in 22 years, because economic activity hasn't slowed as much as expected. But this inflation report casts doubt on whether the Fed will really raise rates this time as expected.

Timiraos mentioned that if the economy doesn't slow down further, wages could continue to climb rapidly, supporting strong demand for goods and services, which in turn would boost employment. In addition, if consumers feel secure in their jobs, they may continue to spend, making it more difficult to lower inflation.

Beige Book shows slower inflation in many regions and expects decelerating economic growth

The latest Beige Book released by the Federal Reserve shows that overall economic activity has grown slightly since the last Beige Book was released in late May. Five districts reported slight or moderate growth in economic activity, the other five districts reported no change, and the other two districts reported slight or moderate declines.

The pace of price increases was generally moderate over the current survey period, with several districts citing a slowdown in the pace of inflation increases. Consumer prices rose overall, although reports varied on the extent to which firms passed on their higher input costs. Respondents in some regions expressed reluctance to raise prices as consumers become more price-sensitive, while other regions reported that strong demand allowed firms to maintain profit margins. Input cost pressures remained high in the service sector but eased markedly in the manufacturing sector. Freight costs continued to fall, as did the prices of many construction materials, despite the rise in concrete prices. Prices are expected to be generally stable or lower in the months ahead.

June CPI can't change expectations for a July rate hike

U.S. CPI continued to fall to 3% year-on-year in June from 4% in May, below expectations of 3.1%, recording the 12th consecutive monthly decline and hitting the lowest level since March 2021; CPI rose 0.2% from a month earlier, higher than the reading of 0.1% last month but below expectations of 0.3%.

Improvement in core inflation has been stagnant so far this year, but the main factor that has caused core inflation to go sideways has been concentrated in sub-components since March, notably used cars. If this factor is removed, very broad signs of disinflation can be observed.

It is important to note, however, that as headline inflation comes into the 2%-3% range, it will become increasingly difficult to bring it down again, not even easier than bringing it down from 9% to 3%.

In addition, the Fed's decision-making is now more inclined to be "backward-looking." Based on that core inflation barely improved in the first half of the year and the labor market is too strong, almost all Fed officials believe that interest rates should be raised by at least 25 basis points. In light of this, the single data in June (either non-farm payrolls or the CPI) could do little to change expectations for another 25 basis point rate hike in July.

Finally, the Fed has lengthened its decision cycle from monthly to quarterly, meaning it wants to see three months of data before making its next decision. This means that the next decision is likely to be made not in September, but in October/November, when the Fed will be able to see the full three months of data.

[Focus of the Day]

UTC+8 14:00 U.K. GDP MoM (May)

UTC+8 19:30 The minutes of the European Central Bank's June monetary policy meeting

UTC+8 20:30 U.S. Weekly Initial Jobless Claims

UTC+8 20:30 U.S. PPI (Jun)

UTC+8 23:10 San Francisco Fed Chairman Daly accepts an interview with CNBC