40 days and 40 nights, the US Government shutdown continued last week. And it’s become the longest in history. Talks on a potential deal to end the shutdown are at least starting to emerge. But for now, the disruption grows from cancelled flights, missed pay cheques and the ongoing lack of official data.

With limited data flow out of the US, markets looked to central banks last week as the RBA and BoE took the stage. Both central banks left their cash rates unchanged as expected. But both struck very different tones. The BoE more dovish, and the RBA emphasised caution and conveyed a neutral policy bias.

The BoE decision came down to a 5-4 vote, with more committee members in favour of a cut than had been expected. Importantly, with UK inflation believed to have peaked and further disinflation pressure expected, the BoE noted that interest rates are “likely to continue on a gradual downward path.” Markets are now pricing in a greater probability of a rate cut in December.

The RBA’s decision was instead a unanimous and uncommitted hold. Governor Michele Bullock even commented in her press conference that they have no bias in the direction of rates. And the board ultimately “remains alert to the heightened level of uncertainty about the outlook in both directions.” Again, some local commentators continue to call it the end of the Aussie easing cycle.

At home the latest look into the labour market lacked any big bang fireworks (see our full review). Overall, the report came largely in line with our and the RBNZ’s forecasts. The labour market appears to be stabilising. But the degree of slack still in the market should provide the RBNZ with comfort that inflation will return to the 2% target next year. Indeed, with weak wage growth, the labour market is not a source of inflationary pressure. The door remains wide open for a 25bps cut to the cash rate later this month.

As expected, the unemployment rate lifted to a nine-year high of 5.3%, up from 5.2%. The underutilisation rate – a broader measure of untapped labour market capacity – rose to 12.9% from 12.8%, the highest since September 2020.

Employment was flat over the quarter as well-signalled by the monthly filled jobs data. The appetite for labour is slowly improving. Filled jobs appears to have hit a trough in July. Since then, filled jobs began to tick higher with a decent (albeit likely overstated) 0.3% in September. Given current weak economic activity, we don’t expect labour demand to take off like a bucking horse. Annual employment growth is still down 0.6%. But the September quarter likely marked the turning point.

A duo of a 0.3% lift in working age population but flat employment resulted in both higher unemployment and lower participation in the labour force. The number of unemployed in New Zealand hit 160k, the highest since March 1994 (162k). The labour force participation rate dropped to 70.3% from 70.5%. It’s the lowest in over four years. Right now, no one is dusting off their CVs and rushing to get into the market. The economy is simply not strong enough.

Hours worked provided a sparkle of good news. Total hours worked lifted 0.9% over the September quarter, breaking a steady seven-quarter stretch of declines. Employers had previously been slashing hours in response to soft economic demand. But this appears to be reversing. However, on an annual basis, hours worked is still down 1.4%. The quarterly lift supports forecasts for a rebound in economic activity over the third quarter.

Financial Markets

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

In rates, a market consensus cut anchors the Kiwi short-end

“Kiwi short-end rates are beginning to settle around an anchor point. Market consensus is for -a 25bp cut at the RBNZ’s November meeting, with pricing currently reflecting a -29bp reduction. Notably, one offshore bank is forecasting a more aggressive -50bp cut. Looking ahead to February, expectations for a follow-up move are fluctuating between a -10bp and -15bp cut. Last week, rates closed near the bottom of recent ranges, largely driven by offshore developments. The risk-reward profile for directional trades in Kiwi rates has shifted, influenced by a more cautious tone from offshore central banks such as the RBA and the Fed, both of which appear less committed to further easing. Domestically, economic data suggests a slow inflection point. Mortgage fixing activity remains concentrated in the 1-year term and is unlikely to extend further until there is clearer confirmation of the end to the rate-cutting cycle. Tomorrow’s inflation expectations data will be closely watched for signs of a continued, gradual decline in inflation pressures.

With the ongoing US government shutdown delaying official data releases, markets are increasingly reliant on private sector indicators adding to volatility as investors attempt to interpret the economic outlook. Recent private data points to continued economic softness, contrasting with the Fed’s more hawkish stance at the end of October. Central banks remain divided. The Fed saw two dissenters, one advocating for a hold, the other for a 50bp cut. While the Bank of England’s decision to hold rates came down to a narrow 5-4 vote. Turning points in monetary policy are rarely clear-cut, and the current lack of US data, combined with equity valuation concerns, sets the stage for heightened market turbulence. For the RBNZ, caution is likely to prevail, especially given the historical sensitivity to boom-bust cycles and the increased scrutiny surrounding policy decisions—particularly under new Governor Breman. Key upcoming events include the RBNZ’s policy meeting on 26 November and Q3 GDP data due on 18 December.” Ross Weston, Head of Balance Sheet Management– Treasury.

In currencies, the Kiwi is under pressure

“Last week the Kiwi dollar softened, as the Q3 labour market data confirmed that there was further loosening in labour market conditions. The data supports a 25bp cut from the RBNZ at the end of the month. The fundamentals saw the Kiwi dollar slip from 0.5725 to a low of 0.5627 initially, with the Kiwi continuing to underperform other G10 currencies. Some softness in the US dollar at the end of the week saw the Kiwi fail to stage a recovery, capped at 0.5670. The high frequency data releases, like the Business Activity outlook survey, are starting to indicate some green shoots in the economy. But we may need to see that final cut from the RBNZ to cement confidence. The Kiwi dollar is certainly looking at little oversold at current levels, diving further to a low of 0.5606 late on Friday before recovering to close the New York session at 0.5623. The key driver for direction the next few weeks will of course be the RBNZ’s MPS at the end of the month. We think it more likely than not that the RBNZ will deliver a ‘straight bat’ cut in November, and be somewhat noncommittal as to the OCR from that point, perhaps a very 50/50 view on further cuts after that. US dollar direction will also be a key factor. The US dollar is starting to show the strain of the US government shut down, in addition to the concerns that are growing around the loosening in the US labour market. However in the short term it is looking likely that the .DXY (US dollar index) may remain supported at 99.50.

The NZDAUD cross slipped significantly lower at the end of the week, driven in part by the NZ labour market print, but also the RBA’s relatively hawkish hold on Tuesday. The potential for further cuts from the RBA are looking less and less certain, with some commentators now considering that the RBA are done with policy easing and the market has a ‘technical cut’ priced in, indicating the RBA’s optionality. After initially managing to hold ground at 0.8683/8700 levels mid-week the NZDAUD cross dipped to a low of 0.8645 on Friday. With the cross now having broken through key technical levels not seen since 2022, we may now be looking at further significant moves lower. The data focus this week is closer to home, with Aussie employment and the RBNZ’s 2yr ahead inflation expectations. It may be a key week for the NZDAUD cross.” Mieneke Perniskie– Senior Dealer, Financial Markets.

Weekly Calendar

• Domestically, the RBNZ's survey of inflation expectations is due out on Tuesday. It's the last key dataprint before the Monetary Policy Statement on Nov 27. Short-term expectations are at risk of a modest increase following the lift in headline CPI to 3% in Q3. However, the longer-term expectations, which are more important for monetary policy - should remain comfortably within the RBNZ's 1-3% target band given the ongoing softness and spare capacity in the economy.
• Across the Tasman, jobs data is due out this week. Aussie employment growth has slowed recently running below the long-term pace of about 1.9%. It follows strong gains over 2024. For the month of October, the market expects that about 19k jobs were added. The unemployment rate is picked to drop down to 4.4% from 4.5%.
• In the UK, data this week is expected to show a loosening labour market. Private sector pay growth is expected to continue its downtrend to 4.2% in the three months to September, down from 4.4%. The unemployment rate is picked to hold at 4.9% over the same period. However, caution is needed when interpreting the unemployment rate as the Labour Force Survey continues to be plagued by historically low response rates. Also to be released this week is UK GDP for the September quarter. Monthly data points to a subdued quarter. Economic activity is expected to have lifted 0.2%, following a 0.3% increase in Q2. A slowdown in the global economy as well as a loosening labour market are weighing on activity.
• The US government shutdown continues into its fourth week and continues to impact data releases. CPI for October was scheduled for release this week. But with the Bureau of Labor Statistics out of action in October, no price data was collected for the month. Should the data have been collected and then released, market consensus expected a modest 0.2% lift in consumer prices - soft enough to open the door to a rate cut by the Fed in December.

See our 'Weekly Calendar' for more