Without much to play with locally, our attention turns to offshore developments. Over in the US, the Fed will cut interest rates next week – it’s all but a done deal. It will be the first cut in four years. But uncertainty surrounds just how big the first move will be. Fed Chair Powell muddied the water by emphasising the risks to employment in his speech at Jackson Hole a fortnight ago. Powell remarked – “We do not seek or welcome further cooling in labour market conditions… We will do everything we can to support a strong labour market as we make further progress toward price stability”.

Financial market participants have been debating a 25bps or 50bps move to kick off the cutting cycle. The August payrolls prints was expected to settle the debate. The report, however, was a mixed read. Over the month, the US economy added 145k jobs compared to forecasts of 165k. And there were chunky revisions to the previous two months. July was revised down by 25k, while a substantial 61k was taken out of June. Average payrolls over the last three months is now at the lowest level since March 2020. One for the doves. The unemployment rate fell, as expected, from 4.3% to 4.2%. But rounded to the second decimal point, it’s a dip of just 3bps (from 4.25% to 4.22%) – so hardly a significant improvement. The underemployment rate, a broader measure of slack in the market, climbed to the highest since October 2021 at 7.9%.

Something to appease the hawks was the strong lift in wage growth. Average hourly earnings picked up the pace in August, increasing 0.4% from 0.2% in July. On an annual basis, wage growth accelerated to 3.8% from 3.6%.

For all the anticipation leading up to the August payrolls print, market traders are still left scratching their heads. The data is bad, but not terrible. Whether the Fed will opt for a 25bps or 50bps cut, the outcome still feels as likely as a game of petal-picking. For an economy that is slowing, but not crashing, a steady easing cycle of 25bps cuts at a time – reserving the right to be more aggressive down the line – would be the most likely approach.

As the Fed deliberates its first move, the cutting cycles of many of its peers are well underway. The Bank of Canada delivered its third straight 25bps cuts last week, taking its key benchmark rate to 4.25%. The BoC meet another two times this year, and a further 50bps of easing are expected by year-end. Next up is the European Central Bank who meet this week. The ECB will likely resume rate cuts after pausing in July. Inflation and economic growth in the eurozone both have proven weaker than expected, prompting the ECB to deliver more rate relief.

Here at home, the past couple of weeks has had us in a bit of a holding pen for any major data releases. But high frequency data, along with partial indicator data for the upcoming June quarter GDP numbers, have been keeping us busy. Last week we saw our terms of trade lift a modest 2% over the June quarter driven largely by a lift in prices across dairy and meat. Countering that good news, however, building activity continued its slump over the quarter. See our Chart of the Week for more.

Financial markets

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

In rates, markets spend time reading the tea leaves:

“Last week rates spent the week reading tea leaves awaiting Friday night’s US non-farm payroll release. The weaker release coupled with Fed speak cemented US short end pricing for a -50bp cut at one, or more, of the next three meetings with -115bp of cuts priced. This week’s US CPI the final piece in a very uncertain -25bp or 50bp cut picture. Why’s this important to Kiwi rates? The transmission is usually via the currency channel, weaker USD translates to a stronger NZDUSD which makes it difficult for exporters while also lowering tradable inflation. But really this feels like the syncing of monetary policy as it was in the hiking cycle, and NZ and the US are closely aligned in both timing and end point when it comes to easing.

Term NZ rates are back near the lows seen post August RBNZ. This a result of FED pricing above, offset by OIS meeting date pricing being higher than the post August flow related RBNZ lows. Regardless, aggressive cuts are priced with -200bp of cuts over the next year/7 meetings, with -117bp of that priced to come by Feb 2025 very similar to the markets expectations of the FED. Recent NZ confidence data suggests a basing effect and the lagged effect of mortgage fixing will be much shorter than previous cycles, but we have to confront the lagged quarterly data which will paint a very weak picture. Yield curves have turned positive in both the US and NZ, both only mildly and between 2 and 10 years, but at least that points to a glimmer of optimism forming. The Bank of Canada cut rates by -25bps for the third consecutive time to 4.25% last week and the ECB expected to cut by -25bp this week, every country is different but at least the starting of a play book is there.

In summary until the -25bp or -50bp cut question is answered expect continued +25bp volatility in rates markets. For NZ it’s difficult to have long/received positions on via the swap market for an extended period, carry and roll (accrual) is very expensive… -14bp a month holding cost for 1 year received. This week will be focused on NZ Q2 partials for the GDP report out next week, although that will be overshadowed given it is released hours after the FED meeting. Outside that we’ll ebb and flow with offshore moves once again, and given the RBNZ’s new focus on forward real time economic indicators we should all be placing more on those as opposed to US data or lagged 2Q NZ GDP data!” Ross Weston, Head of Balance Sheet – Treasury.

In currencies, the Kiwi dollar was well supported by a soft Greenback:

“The Kiwi dollar has benefitted from a fall in the US dollar over the last couple of weeks, as traders prepare for the likelihood of a cut from the Fed. It seems to be considered almost a given that they will cut next week, and the magnitude is what is up for debate: will they cut 25bp or 50bp? The US dollar has also been sold off as concerns around the US economy take centre stage. Any data point out of the US, particularly around employment sustainability and the continued softening in inflation, is providing further momentum for a softening in the Greenback. Last week’s private payrolls and non-farm payrolls reports both disappointed with softer than anticipated prints, and the market is running with the view that the US economy is cooling more quickly than anticipated. Some analysts are calling for a 50 point cut from the Fed next week, rather than the more likely 25bps. Equity markets have also been on edge, in a perhaps self-fulfilling view that September is a tough month for stock markets. This week we have the inflation print out of the US. Further cooling is likely to exacerbate the recent moves we have seen in the US dollar, which could provide the impetus for the Kiwi to head back up to the 0.6300 level. Next week we have ‘Super Thursday’ with both the Federal Reserve rate decision, and NZ’s Q3 GDP print. The GDP print is likely to be ugly, which should provide some downside pressure to the Kiwi. If the Fed take a cautious stance to their rate cutting cycle, there could be a good correction higher for the US dollar. We see this week as having potential for some further upside in the Kiwi, but that may then all be unwound next week. NZDAUD could also be due a correction lower but we will need to see some local data points, with GDP likely to be a major opportunity for this. The RBA are still sounding relatively hawkish and are unlikely to deliver cuts any time soon, while the RBNZ are likely to continue delivering a series of 25bp cuts. The interest rate differential should see the NZDAUD cross lower.” Mieneke Perniskie, Trader - Financial Markets.

The week ahead

• Here at home, there's a bit of data due out this week. The last of the partial indicator data will be released ahead of the GDP print next Thursday. Also on the calendar is the July migration data (Wednesday), and selected price indexes (Thursday). Stats NZ's electronic card spend data is also due out on Thursday which will capture the first full month of the personal tax cuts.
• US CPI inflation is the key market event this week, however it's likely to be yet another benign print. US consumer prices likely rose 0.2% over August, the same increase as over July. Monthly core inflation is also expected to rise just 0.2%. as weak price growth for used cars and discretionary consumer goods continues to weigh on core goods inflation. Annually, headline inflation likely dipped to 2.6% from 2.9%, while core likely remained at 3.2%. The data is key piece ahead of the Federal Reserve's policy announcement on September 19. However, the outcome is unlikely to deter the Fed from cutting interest rates, as widely expected, as the Fed has shifted its focus toward employment risks.
• The ECB will announce its latest policy decision this week, and is widely expected to cut rates for the second time by 25bps. Inflation has recently surprised to the downside, and economic growth has proven weaker than expected. Another 25bps cutis expected in December, however the strength in services inflation and pay growth means the ECB will likely refrain from offering such explicit forward guidance.
• UK labour market is due out this week and will likely show a continued cooling in pay pressures. In the three months to July, private sector pay gains likely decelerated to below 5% from 5.2%. The unemployment may fall from 5.2%, however the low response rate continues to affect the Labour Force Survey.
• China's price and trade data for August is due out this week. Annual consumer price inflation may accelerate slightly to 0.7%yoy from 0.5%yoy. For producer price inflation (PPI), falling commodity costs will likely show the drop in the PPI deepen, from -0.8%yoy to -1.4%yoy. In terms of trade, China's export growth likely slowed in August, for a second month in a row given softer overseas demand. Export growth is expected to slow to 6.7%yoy from 7%yoy in July. Domestic demand has also been weak, with import growth expected to moderate from 7.2% to 2.3%yoy.

See our Weekly Calendar for more data releases and economic events this week.