"I'm surprised I knocked him down so early", said Pacquiao who extended his record to 60 wins, seven losses and two draws.
It was a dominant, devastating display as "smoking hot" Pacquiao registered the 60th win of a fabled 23-year career that now looks certain to extend beyond his 40th birthday in December.
Last year, Duterte said he wanted Pacquiao, a senator, to be the Southeast Asian nation's next president.
Pacquiao will also be without the services of his Hall of Fame trainer Freddie Roach after parting ways.
The Filipino legend was hit with a low blow to start the sixth, but it barely slowed him down as another powerful left uppercut in the seventh dropped Matthysse for a third time.
The win gave the Filipino, who has been world champion at eight different weights, his first inside the distance since 2009.
Pacquiao's knockout victory was a long time coming, said James Puebla, a nursing student.
We won't back Chequers plan, says SNP
Others have voiced their support for May's premiership and against a future Labour prime minister. His replacement will be announced shortly.
A fan reacts during a televised broadcast of the welterweight boxing match between Manny Pacquiao and Lucas Matthysse, at a gym in Marikina, Metro Manila, Philippines, July 15, 2018. We weren't pushing hard like when we were young.
Nicknamed "The Pacman", he won his 12th title after wresting the WBA welterweight belt from the 35-year-old Argentine with a seventh round technical knockout.
Aside from the world title fights involving the two Filipinos, there will be two more world championships in the Fight of Champions fight card. "When you see me in training, you can tell I'm like 28, 27 years old", Pacquiao said.
"It looks like sir Manny's conditioning is good", said IBF super flyweight champion Jerwin Ancajas who was present at the event.
"Right now, I'm happy to go back to my country and celebrate the victory".
Lu Bin (106.7 pounds) of China takes on Carlos Canizales of Venezuela (106.4 pounds) for his WBA world light flyweight title while two-time world champion Moruthi Mthlane (111.5 pounds) of South Africa battles Muhammad Waseem (111.3 pounds) of Pakistan.