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[Quick Facts]

1. Waller says two more rate hikes are needed this year to curb inflation.

2. Fed's noted hawk Bullard steps down, doves expected to be stronger.

3. ECB says further rate hikes are likely after July.

4. U.S. budget deficit soars 170% y/y and new bipartisan fight may loom.

5. Market bets on U.S. interest rates topping out.

6. RBA gets first female governor.

[News Details]

Waller says two more rate hikes are needed this year to curb inflation

The rate target range will be raised two more times in the remaining four meetings this year, 25 basis points each time, which is necessary to keep inflation moving toward our goal, Fed Governor Christopher Waller said in a speech on July 13.

In addition, policy constraints will need to be maintained for some time to keep inflation stabilized near our 2 percent target. With another month of data to assess lending conditions since the June meeting, Waller is more confident that the banking turmoil will not cause major problems for the economy, and he sees no reason why the first of two rate hikes shouldn't happen at the policy meeting later this month.

Waller noted that the Fed's five-percentage-point rate hikes since the beginning of 2022 have had an impact on the economy, which means the central bank should continue to tighten rather than wait and see what happens or whether past moves will ultimately slow economic growth.

Fed's noted hawk Bullard steps down, doves expected to be stronger

The Fed's noted hawk James Bullard stepped down from his post as president of the Federal Reserve Bank of St. Louis on Thursday (July 14), and will leave the Fed completely on August 14, to become the inaugural dean of the School of Business at Purdue University. During this period, he will no longer fulfill the monetary policy-related duties in the Federal Open Market Committee and also stop all public speeches. Kathleen O'Neill Paese, the No. 2 official at the St. Louis Fed, will become acting president.

Bullard has been promoting the Fed to take more aggressive rate hikes since mid-2021. He argued that the Fed was wrong to consider price pressures "transitory" and was among the first to call for 75bp hikes. His departure will weaken the Fed's hawkish voice, while several other members, such as the Chicago Fed President Austan Goolsbee, who always deliver dovish speeches may become more influential.

ECB says further rate hikes are likely after July

The latest minutes of the European Central Bank's June meeting showed that in order to achieve the inflation forecast target, at least two consecutive interest rate hikes by the ECB's governing council would be needed in June and July, and further rate increases could be considered after July if necessary.

Members thought that it was necessary to convey the message that monetary policy has a longer way to go to bring inflation back to the target level in a timely manner. Members agreed to follow a "data-dependent" and "meeting-by-meeting" approach to determine the rate after July.

The ECB said inflation is expected to remain persistently high, raising questions about its ability to return inflation to target in a timely manner. Indicators of underlying price pressures remain strong, although some are showing initial signs of weakening and the impact of a gradual tightening of policy on real economic activity will gradually be felt.

The minutes were hawkish, with the most striking observation being that the peak and duration of deposit rates reflected in the forward curve were insufficient to achieve the inflation target. Market pricing did not change much after the release of the minutes, largely because rate hikes in July and September are more likely than no hike at all. The likelihood of a rate hike in September is 65%. The most likely scenario is that once the deposit rate reaches 4%, the ECB will "skip" the October meeting and probably raise rates again at its December meeting.

U.S. budget deficit soars 170% y/y and new bipartisan fight may loom

In the first nine months of fiscal year 2023, the cost of servicing US government debt jumped by 25% to $652 billion, resulting in a substantial expansion of the budget deficit. Data released by the U.S. Treasury Department on Thursday showed that the federal deficit reached $1.39 trillion in the nine months through June, an increase of about 170% from the same period a year earlier. The widening deficit could cause Republican lawmakers to increase pressure to cut federal spending. While Republicans, who control the House of Representatives, reached a deal with the Biden administration earlier this summer to suspend the debt ceiling, a new fight is looming over appropriations for fiscal year 2024, which will begin on October 1.

Market bets on U.S. interest rates topping out

On July 13, the yield on the U.S. two-year Treasury securities continued its double-digit decline, dropping as much as 14 basis points during the session to 4.611%, its lowest level in nearly a month. Other bond yields fell as well: the yield on the ten-year Treasury securities fell for the fourth consecutive day, dropping more than 10 basis points to 3.754% during the session.

Meanwhile, with the release of a series of economic data about the U.S. inflation situation, the market expectations for the Federal Reserve to continue to raise interest rates are weakening, and dovish expectations have risen sharply, which is a positive signal for bonds being sold off for consecutive months.

The market is now betting that July will see the last Fed rate hike, although interest rate traders expect that there may not be a rate cut before May 2024.

RBA gets first female governor

The Australian government announced today the appointment of the Reserve Bank of Australia's original Deputy Governor Michele Bullock as the new governor, with a term of office of seven years, effective from September 17 this year to formally replace the current RBA Governor Philip Lowe. No suitable candidate for the vacant deputy governor has been announced. In addition, Bullock will be the first female governor of the RBA in 63 years.

[Focus of the Day]

UTC+8 22:00 U.S. UMich Consumer Confidence Index Prelim (Jul)