The latest Kiwi labour market report speaks volumes to the state of our economy. Everything in the report showed scars of the recession. The unemployment rate was unchanged at 5.1%, below the RBNZ’s estimate of 5.2% and our forecast 5.3%. But the details of the report were weak, as expected. Workers may not be losing their jobs, but many are losing valuable hours. The underutilisation rate rose, even as unemployment remained steady. While the number of people with jobs, but not enough hours, rose again. And the trend was also highlighted in the fall in full time employment and rise in part time.

What matters more for the economic outlook, is the hours worked. Hours worked fell a hefty 2.9% over the year, and has been declining for 5 consecutive quarters. Declining hours is also being met with weaker wages. More and more workers are receiving smaller and smaller pay rises. For example, the number of workers receiving a pay rise above 2% but below 3% has been steadily increasing for 7 quarters. And the wage bill (private sector Labour Cost Index, seasonally adjusted) rose 2.5% over the year, down from 2.9%yoy last quarter and a peak of 4.5%. That’s indicative of a sharp recession. And so too is the drop in participation. The participation rate fell, again, to 70.8% from 70.9%. That’s a mighty fall from the 72.4% peak in mid-2023. Put simply, the labour market is not as attractive as it once was. As the demand for workers falls, would-be-workers give up and leave.

All indicators support our call for lower interest rates.

Demand for labour has clearly softened, and wage inflation is quickly cooling. We should have stimulatory monetary policy (not the current restrictive setting). We expect another 100bps of rate cuts to 2.5%. The uncertainty surrounding Trump’s tariffs demands caution as well.

Progress has finally been made on trade negotiations. Late last week, President Donald Trump and British Prime Minister Keir Starmer announced a trade agreement. Though light on details, and not formally signed, the general terms of the deal would see the US leaving it’s 10% baseline tariff on most UK goods. However, the 25% tariff on British steel is gone, and the tariff on British cars will fall from 27.5% to the baseline 10% - but just for the first 100k cars imported each year. Additionally, both countries have agreed to new reciprocal access on beef with UK farmers given a first-ever tariff-free quota for 13,000 metric tonnes.

Tariff de-escalation is the story many want to hear. That said, the UK deal should not be seen as the blueprint for future trade deals. The US is targeting countries in which the US runs a trade deficit. The US runs a trade surplus with the UK, which may explain their relative moderate concession. Trump may demand more from countries with which the US runs a trade deficit. It’s part of his desire to rebalance the US trade deficit, and generate revenue to lower taxes.

As for de-escalation between China and the US, we know talks are finally happening in Switzerland. But so far, the only news we have is that “substantial progress” is being made and that talks are “productive. We’ll keep watching… waiting… and waiting…

Financial Markets

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

In rates, Kiwi yields jog on the spot

“NZ rates continue to jog on the spot holding tight ranges. NZ employment and the FED meeting failed to illicit much of a market reaction. FED Chair Powell reiterated that the Fed doesn’t need to be in a hurry to adjust rates, while Kiwi employment looked strong on the surface with a soft underbelly. The RBNZ FSR highlighted the normal financial risks, noting they had increased, seemingly giving the market confidence to remain on the received side of the ledger. The late week US/UK trade deal generated a 10-12bp rise in US yields, NZ again underperformed that move finishing +2bp higher. The US has -66bp of cuts priced by the end of the year, the least since liberation day, as the FED wrestle with the inflation vs growth outlooks.

With the RBNZ May 28 meeting looming NZ rates markets will start to refocus on domestic factors. Base case must be a reduction in the OCR forecast from the current 3.10% end of 2025 floor forecast back in February. At least a further -20/30bp reduction seems likely to 2.80/2.90% with risk to a much bigger decrease to 2.60%. Market pricing has been relatively consistent at around the 2.70% floor level by the end of the year, obviously the downside continues to be the bigger threat. The once front footed RBNZ operating model likely to be tested against a cautious global market backdrop, all but ruling out a -50bp cut. Next week NZ company reporting season kicks off, watch for green shoots. Ross Weston, Head of Balance Sheet – Treasury

In currencies, the greenback regains some upward momentum amid positive tariff headlines

“Last week was again dominated by headlines around tariffs, but this time in a more positive light which saw the US dollar regain some upward momentum. We also heard from two major Central Banks, the Federal Reserve and the Bank of England, who both had rate decisions. The Federal Reserve kept rates on hold, with J Powell restating that he thinks that the Fed have time to wait to see how global trade discussions pan out, so that they can closely monitor the potentially inflationary aspects of this on the US economy. This saw some limited strength in the US dollar. The Bank of England on the other hand, delivered a 25bp cut to their cash rate, as was anticipated by the market, but the accompanying statement was more on the hawkish side, with BoE Governor, Andrew Bailey steering well clear of providing any commentary that would indicate that they see another rate cut in June on the cards. Also big news on the trade and tariff front last week, was the announcement of an agreement being made between the US and the UK. All of the finer details are not yet available of course, but it was a positive outcome after a fraught few weeks for market participants. The Pound was higher on the back of this. Over the weekend there was further positivity on trade talks, with Trump stating that the first round of discussions with Chinese officials has gone well, calling it a “very good” meeting. The recovering US dollar, saw the Kiwi pull back, and after trading close to the 0.5950-0.6000 level in the early part of the week, eventually traded down to a low of 0.5881. We closed the week at 0.5910. The NZDAUD was also lower, back at 0.9200 after a high of 0.9273 for the week, with the Aussie dollar benefiting more from positive trade talks. Complicating matters on the geopolitical front, tensions between India and Pakistan have escalated, and we may see some impacts of this in the week ahead. For now, they have agreed to a US meditated truce. In the week ahead we will more likely see a little more positive momentum for the US dollar, should trade discussions remain positive. But a caveat: we think there are some other things in play now which may limit strength on the Greenback, particularly when looking at offshore holdings of US dollars in emerging markets like Taiwan, who are rebalancing holdings of US dollars, which was evidenced in the big upswing in the Taiwan dollar early last week. This may start to become a bigger story, across other EM countries. We also think that there may be a limit to how far positive trade discussions unwind the broader previous sell off in the US dollar. For this reason, we are not overly bullish on the Greenback for the time being. This week, with a big focus on Wednesday mornings US CPI number for April – the first set of price data including liberation tariffs, we expect the Kiwi dollar will trade in a range between 0.5830-0.5980 in the week ahead.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Here at home, electronic card spending and net migration figures are due on Wednesday, followed by Stats NZ’s monthly price index on Thursday. We expect net migration trends to continue settling back towards their lower, long-run average range of around 30,000 a year, as Kiwi departures remain elevated alongside subdued migrant arrivals. Meanwhile, Stats NZ's range of monthly price indicators should reinforce that inflation remains comfortably under control, staying within the RBNZ’s 1-3% target band. The RBNZ's survey of inflation expectations is due on Friday - the last key data release ahead of the May MPS. Near-term expectations may rise given the latest inflation reading printed stronger than expected. However, the longer-term expectations are more important and should remain close to the RBNZ's 2% target.
• Data from the US will be closely watched this week. On Tuesday, US CPI for April will be scrutinized for signs of tariff-driven inflation following the implementation of Liberation Day tariffs. While on Thursday, US retail sales data will provide key insights into how households responded to April's tariff disruptions. Our attention will be on whether there was front-loading of purchases ahead of anticipated tariff impacts, or if uncertainty weighed more heavily on discretionary spending.
• Thursday will also see the release of Aussie jobs data for April where the unemployment rate is expected to remain unchanged at 4.1%. Despite the unchanged headline, job growth is expected to slow from 32.2k to 25k over the month. While an expected dip in the participation rate is expected to temper the unemployment fallout. Looking ahead, the Aussie labour market is still expected to loosen over 2025 with labour supply outpacing employment growth.

See our Weekly Calendar for more.