Calls for cuts were crystalised by a collapse in confidence

Published on 08 July 2024

European politics consumed the international headlines last week. Across the pond, heat continues to leave the US labour market. Locally, the NZIER's business survey added to the growing list of weak data outturns. This week, the RBNZ is in focus.

jarrod_kerr

Jarrod Kerr

Chief Economist

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Mary Jo Vergara

Senior Economist

Sabrina Delgado

Sabrina Delgado

Economist

  • It was a decisive week for European politics. The UK welcomes a historic change, while a leftist alliance in France works to stave off the far-right.
  • Heat continues to leave the US labour market. The unemployment rate ticked higher, and wage growth slows to the lowest in 3 years.
  • Here at home, the data flow continues to soften. Last week, NZIER’s Quarterly Survey of Business Opinion underscored the painful impact of tight monetary policy. Businesses are hunkering down and pulling back. But there is a glimmer of hope as cost pressures also eased.

It was a decisive week for European politics. The UK welcomes a historic change, while a leftist alliance in France works to stave off the far-right. In the UK, the 14-year reign of the Conservative Party comes to a dramatic end. Sir Keir Starmer is the new prime minister, after his Labour Party swept to power in a landslide victory. But in France, how the tables have turned. After the first round of parliamentary elections, the National Rally was poised to win. But after the second round of votes, the exit polls suggest a surprise upset for the National Rally. A left-wing coalition is now on course to win, albeit still short of an absolute majority. A win for the New Popular Front however bears significant consequences for the state of France’s public finances. The group has promised a major increase in public spending, a boost to the minimum wage and a cut in the retirement age.

Outside of elections, the main data point last week was the US nonfarm payrolls report for June. Job growth came in stronger than expected with 206k jobs added over the month. Though there was also a sharp revision lower of over 100k jobs for the previous two months. At the same time, the unemployment rate rose slightly to 4.1%, reflective of the uptick in the participation rate and more people looking for work. In another sign of a loosening labour market, the average hourly earnings climbed just 0.3% in June taking the annual increase for wages to 3.9% - the lowest in 3 years. All up, it was the kind of report the Fed would want to see. And now undoubtedly attention will turn rightly to their inflation report due out on Friday.

Here at home, we’re quickly rolling round to the RBNZ’s next policy meeting on Wednesday. When we last heard from them in May, we were taken aback by the power of the mighty hawk they unleashed. The RBNZ kept the cash rate unchanged at 5.50% for the seventh meeting in a row. But everything from their tone, forecasts, and updated OCR track, was more hawkish than expected. In fear of persistent inflation, the RBNZ lifted the OCR track from a peak of 5.6% in September '24, to a peak of 5.65 in December. It doesn't sound like much of a difference, but it is. The 5.65% rate implies a 60% (15/25) chance of another hike. Up from a 40% chance (10/25). That was a shot across the bows of the new Government, with their May budget slightly more stimulatory near-term. And the biggest shock of all was that the committee had discussed lifting rates.

At the time, we strongly disagreed. We didn’t see the need for the RBNZ to exert more pain onto households and businesses. The RBNZ simply needed more time. And now, well, we’ve only strengthened our conviction. Any talk of hikes now would be overkill. The data has clearly turned. Actually, it turned a very long time ago, at the end of 2022. And the economy is becoming weaker by the day.

Of course, there are still some hurdles to get through. We still need to see inflation back within the RBNZ’s 1-3% target band. A hard task that should be accomplished in the next few months. But the complete return to 2% is still a 2025 story. Aggressive tightening from the RBNZ has worked. And setting policy today is about influencing the economy over the next 18 months. So, the RBNZ’s sights should be set on the end of 2025, start of 2026. And with that in mind, rate cuts should be considered, not hikes. The weakness in the economy (see COTW) should quell domestic inflation pressures. And by our forecasts, we still see inflation falling back within the RBNZ’s 1-3% target band by the September quarter. That should open up the first rate cut in November.

We will be on the lookout for a material softening in the RBNZ’s forecasts and rhetoric at the August MPS. We would recommend a cut in August… but we’re more concerned about the health of many businesses and households. We shall keep up the good fight.

So, what to expect from this week’s RBNZ meeting?

Well first thing’s first, this Wednesday we’re getting an MP Review, not an MP Statement. So, we won’t get updates to the RBNZ’s forecasts or OCR track. We just get a policy decision and a one-page statement. The last MP Review in April was just 140 words. So, with that in mind, we’re not expecting a whole lot. The RBNZ should acknowledge the even deeper weakness in the economy. And they must refer to the collapse in business confidence last week.

Financial markets

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

In rates, NZ yields grind lower

“NZ yields continue to grind lower as QSBO data added to the growing list of weak NZ data out turns. Last week offshore yields followed the same lower theme, with weak US ISM and Non-Farm Payrolls data increasing the odds of FED cuts this year to -51bp (-21bp of that by September). This all speaks to central banks higher for longer messaging finally gaining traction (sans RBA). One of the unspoken conditions for the RBNZ to cut is the FED easing first, Powell testifies to the senate/house this week will be of special interest as will monthly US CPI. If that’s not enough markets have spotted the growing debt issue in the background and longer end yields are on notice, more so when there is little else to focus on, so not this week!

The RBNZ OCR decision on Wednesday is universally seen by markets participants as a non-event. Most likely the last non live meeting for a while. Currently August has -8bp of cuts priced, October -16bp, and November -39bp. The RBNZ are likely to acknowledge the weaker data, but in their eyes they need to see lower inflation prints which will only likely be seen in 3Q Inflation data released in October. On that note Selected Price Index (SBI) data is released on Thursday, this is now market moving data, and again likely to support the markets move lower in yield.

There has been a change in market heart in the NZ swap market. Receivers are more dominant, the wild +25bp ranges seemingly a thing of the past. In saying that the ranges in short end (1-2 year) have fallen and are establishing at much lower levels now. The carry and rolldown in receiving NZ swap is still punitive, unless the mark to market (or fall in yields) offsets that accrual. Mid(5 year) and longer end(10 year) is a different story as the market gets more comfortable with OCR cuts the curve naturally steepens. That steepening aided by markets pricing in more term risk premium around the growing global debt pile. What ever the case it’s hard to see the RBNZ not cutting before their currently forecast Q3 2025, and certainly any chance of hikes now ruled out. The markets have priced in a OCR low point of around 3.80% by mid-2026, the RBNZ have the OCR low point at 3.00% in Q2 2027. This is the next battle ground, and markets will likely take aim at the neutral OCR as data continues to weaken.” Ross Weston, Head of Balance Sheet – Treasury.

In currencies, the MPR is no gamechanger for the Kiwi

“After opening last week on the back foot, sub 0.6100 at 0.6076, the Kiwi dollar spent the bulk of last week on a upwards trajectory. The NZIER quarterly business opinion survey made for sombre reading early in the week, and the Kiwi initially slid a little lower. But as the week drew on, with UK and French elections in the spotlight, the US dollar was pushed down and this paved the way for the Kiwi to stage a bit of a recovery. After initially tackling the 0.6130 resistance level, US non-farm payrolls gave the Kiwi a further boost to end the week near a high of 0.6170. We open the week at 0.6140. In the week ahead there are a few key pieces of data. Locally we hear from the RBNZ on Wednesday with their Monetary Policy Review. Given this is just a review rather than a full MPS, we consider it unlikely to have a major impact on the Kiwi. The next meeting in August is the one that is likely to provide a little more insight, but probably not enough data would have been published to give the RBNZ real confidence in the timing of rate cuts. So we wait for November. Later in the week we will see the latest US CPI print. Global politics will also remain in the frame this week, with the French election result being keenly watched. For the Kiwi dollar this week, the 0.5920 – 0.6200 narrowing triangle still remains the medium term outlook range for now. NZDAUD still remains poised to test the 0.9050/0.9060 range, although has found some support around the 0.9100 level again. And the Yen still remains firmly under pressure, at 160 Yen to the US dollar.” Mieneke Perniskie, Trader - Financial Markets.

Key data and events

  • This week, the RBNZ's July Monetary Policy Review is the key event. No change to policy is expected, and the RBNZ will likely deliver a similar statement to May. The July review is more of a steppingstone to the more detailed August statement.
  • The US June inflation report is the key data print this week. Headline CPI likely rose 0.1% over the month, which would pull down the annual rate to 3% from 3.3% in May. Monthly core CPI is expected maintain May's 0.2% pace, with the annual measure unchanged at 3.4%.
  • The UK monthly GDP print for May likely grew x% showing that the economy is on course for another healthy gain in the second quarter. Output likely grew by 0.2% in May consistent with a rebound in retail sales. It follows April's flat growth, which may be revised.
  • In China, price data likely edged slightly higher from May's very low levels. Consumer price inflation is expected to increase 0.4%yoy% from 0.3%yoy. The decline in the producer prices index likely narrowed to -0.8%yoy from -1.4%yoy. Trade data for June is also due out, and export growth likely strengthened but more as a result of a favourable year-earlier base of comparison. External demand remains soft. Exports likely rose 8%yoy from 7.6%yoy. Imports likely rose by 2.9%yoy from 1.8%yoy in May.
  • In Japan, pay growth is expected to accelerate with labour cash earnings picking up to 2.1%yoy from 1.6%yoy. This is the kind of data the Bank of Japan has signalled it needs before proceeding with another rate hikes.

Date

 

Economic Indicator

Last

Consensus

Mon, Jul 08

UK

BoE Speaker - Haskel

-

-

Tue, Jul 09

NZ

Jun REINZ House Sales (% yoy)

6.8

-

 

AU

Jul Consumer Confidence (SA % mom)

Jun Business Confidence Index

1.7

-3.0

-

-

 

EZ

ECB Speaker - Cipollone

-

-

 

US

Fed Speaker - Powell (testimony to Senate Banking)

-

-

Wed, Jul 10

NZ

May Net Migration SA

RBNZ Official Cash Rate Review

7,380

5.50

-

5.50

 

CH

Jun PPI (% yoy)

Jun CPI (% yoy)

-1.4

0.3

-0.8

0.4

 

UK

BoE Speakers - Pill, Mann

-

-

 

US

Fed Speaker - Powell (testimony to House Financial Services)

-

-

Thu, Jul 11

NZ

Jun Food Prices (% mom)

-0.2

-

 

UK

May Industrial Production (% yoy)

May Manufacturing Production (% mom)

-0.4

-1.4

0.6

0.4

 

US

Jun CPI (% mom)

Jun CPI (% yoy)

Jun CPI Ex Food and Energy (% yoy)

Fed Speaker - Cook, Bostic, Musalem

0.0

3.3

3.4

-

0.1

3.1

3.4

-

Fri, Jul 12

NZ

Jun BusinessNZ Manufacturing PMI

Jun Electronic Card Transactions Total (% mom)

Jun Electronic Card Transactions Retail (% mom)

47.2

-0.9

-1.1

-

-

-

 

CH

Jun Exports (% yoy)

Jun Imports (% yoy)

Jun Trade Balance (US $bn)

7.6

1.8

82.6

8.0

2.5

85.1

 

US

Jun PPI Final Demand (%mom)

-0.2

0.1