What an end to the week. Many of us found our laptops as nothing more than paperweights over the weekend. The blue screen of death (BSOD) caused all sorts of problems, worldwide. The global IT outage exposed an Achilles heel, disrupting banking, flights, healthcare and retailing. And it looks like a slow recovery. No-one had heard of CrowdStrike or their Falcon sensor. But now we have. It was a software update that will go down in history. And it exposes a serious weakness in the system. We have to give a massive shoutout to our IT teams for the massive effort they put in over the weekend.

Before our screens turned blue, we saw the major banks in New Zealand lowering their carded mortgage, business and term deposit rates. The moves come as wholesale interest rates markets factor in early RBNZ rate cuts. Our call for a rate cut in November has gone from being a distant outlier, to consensus. And market traders have gone further, flirting with the idea of a cut as early as August.

The rally in Kiwi rates (price goes up, interest rate goes down) looks like a bull on steroids having been stung by a bee. As it stands, the wholesale market has 10bps, or 40% (10/25) chance, in August (just weeks away), and a whopping 30bps in October (30/25). That’s a suggestion the RBNZ may cut twice by October. But the main meeting, November, has 68bps priced. That’s a full 50bp cut, and a very high chance of 3 cuts (75bps). We forecast just one 25bp cut in November, but would welcome an earlier move. Market pricing is what the RBNZ should do. But not necessarily what they will do. The tide has turned, however. And the RBNZ discussion of rate hikes in May, should turn to rate cuts in August. The change in tone in August, we believe will set the bank up for a cut in November. The risk now, is tilted towards earlier moves.

The overloaded rate cut pricing has pulled down all interest rates. The pivotal 2-year swap rate – used by banks to hedge 2-year fixed rate flow – has collapsed to 4.35%. The 2-year rate has dropped from 5.2% last month, and is well down from the 5.8% peak in October last year.

We can’t of course go without mentioning last week’s inflation report. The June quarter inflation print was below the RBNZ's forecast, again. See our full review. It's important to understand the swing in numbers, to the downside. Inflation at 3.3% was below our forecast 3.4%, and the 3.6% of the RBNZ. Unfortunately, domestically generated inflation remains a little hot, as imported inflation falls. Imported inflation is now just 0.3%, from 1.6% last quarter, and a hefty peak of 8.7%. Domestic inflation remains heated at 5.4%, well above our forecast, and is down from a peak of 6.8%. Within the domestic price frustrations was a lift in rents (thanks to the migration boom) to 4.8%, a spike in insurance premiums to 14%, and elevated council rates at 9.6%. It's a triple whammy of price hikes, felt by most households. Whether you own or rent, you're hurting.

But last week’s data continues to reinforce the downward momentum in inflation. We’ve seen the headline rate fall from the 7s into the 6s, 5s, 4s, and now into the 3s. Forward-looking indicators point to further moderation in price pressure. Inflation is on track to break back below 3% in the current (September) quarter, and (importantly) on its way to 2% in 2025. Along with a further loosening in the labour market, the RBNZ should be in a position to deliver a rate cut by Christmas. We are sticking with the first cut to come in November, for now. But prospects of an even earlier cut are rising. It all depends on the data.

Financial Markets

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

In rates, the relentless Kiwi rally continues:

“The relentless rally in Kiwi rates kicked off by the pivot in the July MPR Statement continued apace last week, the market only taking a breather to digest the Q2 CPI print on Wednesday. Rates ended the week 15bps lower, though pricing of cuts into 2024 remained where it was at the beginning of the week at around 65bps.

Though the Q2 CPI print was softer than RBNZ and market expectations, it showed non-tradable inflation remaining stubbornly high. This gave the market pause for thought and saw rates higher on the day. On the other hand, Q3 inflation is all but certain to be in the 1-3% target band and by hook or by crook, the RBNZ’s mandate is to get headline inflation back in the band.

It remains uncertain what weight the RBNZ will put on high frequency data which are all flashing red vs lagged official statistics. The CPI print last week gave rise to a clean sweep of Aussie banks bringing forward their calls for the first cut to November. With ASB pushing the boat out calling for consecutive cuts in October and November.

We are back into a limbo zone before the August meeting with nothing to give direction to other than unemployment. This will likely see rates driven by flows and offshore developments.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, A pullback in headline inflation saw the Kiwi track lower:

“The Kiwi dollar continued to trade under the 0.6100 level last week, in the aftermath of the RBNZ’s MPR, where they were more dovish than anticipated. Last week we also saw the release of NZ’s Q2 CPI data. While the headline number was surprisingly good, we still saw plenty of stickiness in non-tradeable inflation. This recalibrated some of the markets expectations for rate cuts, but the market is still pricing in 2 cuts before the year is out, potentially in October as well as November. The Kiwi dollar opened last week at 0.6110 and got to a low of 0.6039 on the back of the CPI print, before tracking back up to 0.6096 as market participants absorbed the higher non-tradables number. As the week wore on, the Kiwi trickled back down to a low of 0.6027. We see the Kiwi continuing to track lower, and this will certainly come into play as we get closer to the potential rate cuts. The Kiwi economy is also continuing to slow. In the week ahead we don’t have lot of data points to drive direction, so we expect market participants will continue to focus on the US election. A bout of risk aversion is likely to kick off at the start of this week, following Biden pulling out of the race. Risk aversion and a higher US dollar will create more of a headwind for any upside for the Kiwi dollar. NZDAUD got some upside support last week, as the CPI concerns around non-tradable’s pushed the Kiwi moderately higher. After opening around 0.9000, the NZDAUD initially tracked lower to 0.8978 prior to the CPI print. We then tracked back up to 0.9040 before closing lower at 0.9000 for the week. Ultimately a tight range tracked across the week.” Mieneke Perniskie, Trader - Financial Markets.