Central banks around the globe were the focus of last week. And we got a whole spectrum of outcomes. Kicking off with the BoJ who, in a historic move, lifted their policy rate 15bps to 0.25%. It doesn’t sound like much, but for Japan it’s the highest cash rate they’ve had since 2008. And it follows the move earlier this year where rates were lifted out of negative territory. However, despite the significance of the move, the market reaction was rather muted with the rate hike being largely expected and potentially leaked ahead of the meeting. Nonetheless, it’s another step towards policy normalisation as inflation and wage growth continue to climb. See our special topic “Land of the rising rates (finally)” for more.

Moving to the West, we saw the US Federal Reserve keep rates unchanged as expected. But Fed Chair Jerome Powell noted: “A reduction in our policy rate could be on the table as soon as the next meeting in September”… with acknowledgement of the “further progress” made on the inflation front. And as if in response to that, US payrolls printed much weaker than expected across the board. Fewer jobs, 114k instead of 175k, were added over July. And the unemployment rate surprisingly lifted from 4.1% to 4.3%, the highest since October 2021. Even better for the Fed was the slowing in measures of wage growth. Average hourly earnings lifted just 0.2% over the month, with the annual rate slowing to 3.6% from a downwardly revised 3.8% (previously 3.9%). Taking everything into account, July’s payrolls support a Fed rate cut in September.

We then rounded off the week with a bang from the Bank of England (BoE) as they commenced their cutting cycle. The BoE lowered their cash rate 25bps to 5.0%. Though it was a very close call, with a 5-4 MPC vote for a cut. On top of that, BoE Governor Andrew Bailey asserted that they were not committing to any further cuts. Like the ECB, the BoE is taking a meeting-by-meeting approach whereby future moves will depend on the data.

Making the round trip back home, we’ll see the RBA meet tomorrow. Market consensus is for another on hold decision as a softer-than-expected inflation print last week reduced risks of further tightening from the RBA. In fact, markets even moved at pace to start pricing in cuts for later this year.

Here at home, there’s still a couple of important data points before the RBNZ have their turn in the sun next week. Labour market data and the RBNZ’s Survey of Inflation Expectations are key. First up, is Stats NZ’s labour market data on Wednesday. We expect a continued loosening in labour market conditions. And by our calculations, the unemployment rate likely lifted to 4.7% from 4.3%. (See our full preview). That would mark the highest rate since the end of 2020. After holding at a record low of 3.2%, the unemployment rate began to climb in June last year. The uptrend will likely continue into 2025.

In light of growing talk and market speculation for earlier RBNZ rate cuts, Wednesday’s release holds high importance. Our estimates of the Kiwi labour market are slightly softer than the RBNZ’s forecasts composed in May. The RBNZ expects a rise in the unemployment rate to 4.6% and a slowdown in annual wage growth to 3.6%. High-frequency indicators however suggest that the risks are skewed to a weaker labour market than the RBNZ assumed. At the July policy review, we saw the RBNZ soften its tone. If the labour market release plays to our forecasts, or even softer, then we will likely see the RBNZ double down its dovish tilt in August. We remain of the view that the RBNZ will cut rates earlier than they currently expect, with the cutting cycle commencing in November.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, the NZ 2y manages the largest monthly decrease since the GFC:

“Kiwi swap rates ended the week down a modest 5bps across the curve. This after NZ 2y managed the largest monthly decrease (-73bp) since the GFC in July. However, August will be the first and biggest hurdle for whether RBNZ delivers to market pricing with over 50% of a chance of a cut priced in this month’s meeting.

Last week Kiwi rates lacked strong direction while offshore saw a blockbuster line up of central bank decisions and major data releases. FOMC signalling cuts could come in September, though remaining stubbornly dependant on the data. Taking a different tack, BoE got in on the action with a surprise cut. US Employment data came in much weaker than expected with unemployment increasing against expectations to remain steady this has seen US treasury yields decrease 20bps.

Over the Tasman, RBA must have let out a massive sigh of relief as trimmed mean CPI printed below market expectations. CPI remaining on the right side of the red line drawn by the RBA saw pricing of hikes turn into cuts. RBA are meeting tomorrow, however domestically employment will be critical as last piece of puzzle before the August meeting. The market will be sensitive to anything much higher than RBNZ forecast.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, central bank expectations continue to drive moves:

“It was a big week for central banks and data last week, and the Kiwi managed to find a slightly firmer footing on the back of it. The Federal Reserve were the main focus for market participants. While they kept rates on hold, the Fed have opened the door to a potential first cut in September. However, markets are becoming anxious about the softening in the US labour market, concerned that the Fed may have left rates too high for too long. This view was exacerbated at the end of the week with the softer than anticipated Nonfarm payrolls number, and a solid tick up in the unemployment rate. The US dollar was on the back foot from the middle of the week, and this saw the Kiwi manage to have a couple of runs at the 0.5980 level, before being beaten back to 0.5950. The week ahead has a couple of important data points locally, with our own labour market data due out, as well as the RBNZs 2year ahead inflation expectations. Both have the potential to raise further concerns that the RBNZ need to cut rates sooner rather than later, so we would certainly temper any major upside potential for the Kiwi dollar. For the week ahead we expect to be fairly range bound in the 0.5850 –0.5980 levels, with downside potentially being more likely. NZDAUD has had a good run higher to 0.9150. This is perhaps overdone for now, and likely capped at 0.9220. Tomorrow we hear from the RBA, who are expected to keep rates on hold. There is potential for them to continue to raise concerns around sticky inflation, or cool market expectations about rate cuts in 2025, so this may see a bit of an unwind in the NZDAUD rally, should the Aussie dollar head higher.” Mieneke Perniskie, Trader - Financial Markets.

What to watch in the week ahead. See the calendar for more