Policy Divide Emerges Within the Fed, ECB Rate Hike Expectations Remain Alive

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Summary:

Waller says forward guidance remains an important monetary policy tool; Schnabel says the impact of the Iran war has not yet fully subsided...

Highlights

1. Waller: Forward guidance remains an important monetary policy tool.

2. U.S. June ISM Services PMI came in at 54, marking the 24th consecutive month of expansion.

3. Schnabel: The impact of the Iran war has not yet ended.

4. UAE crude oil output climbed to near a record high in June after leaving OPEC.

5. U.S. Strategic Petroleum Reserve falls to its lowest level since 1983.

6. Russia says contacts between the Russian and U.S. presidents will continue.

Details

Waller: Forward Guidance Remains an Important Monetary Policy Tool

Federal Reserve Governor Christopher Waller said in a speech on Monday that forward guidance remains an important monetary policy tool under appropriate circumstances. By influencing financial conditions before actual changes in policy rates, forward guidance can strengthen the transmission of monetary policy. When used effectively, it can alter economic conditions more quickly than interest rate adjustments alone. Waller said forward guidance should remain part of the Federal Reserve's policy toolkit and continue to be used when appropriate.

However, he acknowledged that forward guidance can sometimes hinder rather than support monetary policy. When multiple economic outcomes are equally likely, its effectiveness diminishes because it reduces the Fed's flexibility in responding to changing economic conditions.

Waller's remarks contrasted with those of Fed Chair Kevin Warsh, who favors avoiding forward guidance in favor of data-dependent decision-making while keeping all policy options open without committing to a predetermined path.

U.S. June ISM Services PMI at 54, Expanding for the 24th Consecutive Month

The latest ISM Services PMI report showed that economic activity in the U.S. services sector continued to expand in June. The Services PMI registered 54.0, marking the 24th consecutive month of expansion.

Steve Miller, Chair of the ISM Services Business Survey Committee, said the Services PMI fell 0.5 points from May's 54.5. The Business Activity Index remained in expansion territory but declined 2.3 points to 55.4 from 57.7 in May.

The Prices Index fell to 67.7 in June from 71.3 in May, dropping below 70 for the first time since February. Although lower, the index has remained above 60 for 19 consecutive months, with a 12-month average of 68.

Diesel, gasoline, crude oil, and related products were once again cited as the commodities experiencing the largest price increases in June, although some respondents reported declining prices.

The divergence may reflect differences in contract terms across companies. Some respondents said they paid lower prices for gasoline and diesel, though this was not a widespread trend. ISM expects higher oil prices to continue passing through supply chains over the coming months. However, if shipping conditions through the Strait of Hormuz continue to improve, price pressures could ease by autumn.

Schnabel: The Impact of the Iran War Has Not Yet Ended

European Central Bank Executive Board member Isabel Schnabel said on Monday that although oil prices have declined, the eurozone economy has not yet returned to its pre-Iran war state because core inflation remains elevated and underlying price pressures persist.

She said the immediate shock from the Iran war appears to have passed, meaning that if the ECB intends to deliver another rate hike to contain inflation, it should not wait too long.

Although markets increasingly see another ECB rate hike at the next meeting as unlikely, Schnabel's remarks left the door open for further policy tightening.

UAE Crude Output Climbs to Near Record High After Leaving OPEC

According to two sources familiar with production data, the United Arab Emirates raised its crude oil output to more than 3.8 million barrels per day in June, close to a record high, after leaving OPEC to free itself from production limits.

Reuters estimates that June output was the highest since April 2020 and exceeded pre-Iran war levels, lending support to the UAE's decision to withdraw from OPEC and OPEC+ on May 1.

U.S. Strategic Petroleum Reserve Falls to Lowest Level Since 1983

Data from the U.S. Department of Energy showed that during the week ending July 3, crude oil inventories in the Strategic Petroleum Reserve (SPR) fell by 6.2 million barrels to 319.5 million barrels, the lowest level since April 1983.

The decline is part of the U.S. government's approved release of 172 million barrels from the SPR, aimed at offsetting the global supply shortfall that emerged following the Iran war and helping to lower oil prices.

Since the outbreak of the conflict at the end of February, total U.S. crude inventories—including commercial stocks and the SPR—have fallen by 120.71 million barrels to 734 million barrels as of June 26, the lowest level since 1984.

Russia Says Contacts Between Russian and U.S. Presidents Will Continue

Regarding the Russia-Ukraine conflict and peace negotiations, Russia said it remains open to talks and expects the United States to play a mediating role, while Ukraine called on the U.S. and Europe to strengthen support for its air defense.

Kremlin spokesman Dmitry Peskov said on July 6 that both Russian President Vladimir Putin and U.S. President Donald Trump believe contacts between the two sides will continue in the near future. He added that Trump's position on the Ukraine issue has been consistent and stable, and that the U.S. president is willing to listen to the messages conveyed by Putin.

Today's Focus

15:30 (UTC+8) ECB Governing Council member Fabio Panetta delivers a speech

20:15 (UTC+8) U.S. ADP Employment Change (week ending June 20)

00:00 (UTC+8) EIA releases its Monthly Short-Term Energy Outlook

TBA (UTC+8) U.S. Trade Representative's Office holds a public hearing on a proposal to impose additional tariffs on imports from 60 economies.

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