We’re cautiously looking forward to the GDP data this week. The June quarter was tough. We expect growth to lift just 0.1% over the quarter. This equates to a 1.6% annual average growth rate (Stats NZ’s preferred measure). This lacklustre growth reflects New Zealand’s economy taking a hit from the oil shock. And the recovery was effectively delayed, as businesses clam up with uncertainty. The election is also throwing up fresh concerns.

The latest New Zealand business financial data brought good news. The second quarter of the year saw business sales, purchases, wages, and operating profit all improve. Sales were up $17 billion; that’s 8.9% compared to 2025. Profits were also up $2.1 billion, a 7.9% increase on last year.

Sales values in the electricity, gas, water, and waste services industry group saw the largest increase of 20%, a $1.3 billion quarterly increase, mostly driven by gas price hikes. However, wholesale trade was the largest contributor to the overall sales growth, increasing by $2.7 billion over the June quarter, most likely driven by petroleum products. Although modest by comparison, construction deserves an honourable mention. Sales values for the construction industry grew by 1.5% over the quarter. This matches the improvement in building work being put in place.

One of the largest contributors to these improved metrics was manufacturing. The manufacturing industry saw a $1.1 billion increase in sales value in the June quarter. The growth largely stemmed from increased commodity prices, specifically for meat and dairy.

The latest Performance of Manufacturing Index (PMI) data, shows that the sector continued to expand in August. This marks the third month in a row of growth in the manufacturing sector… good news.

We want to see that activity strengthen for the rest of the year. And we need to see the employment side of the equation improve. As it stands, employment in the manufacturing sector is at a stand-still, meaning that the lift in activity isn’t translating into expansion or hiring plans. More money is coming in, but it’s not being spread around.

The overseas geopolitical landscape overshadowed the domestic good news. Oil prices are at it again, and the global bond market is not liking it at all. Not one bit. And neither are we.

In response to the re-escalation of the US-Iran conflict in the Strait of Hormuz, markets are re-pricing the risk to global inflation back up. Of the few oil tankers managing to get through the Strait, more and more are being targeted by either the US or Iran military. As a result, less oil is getting through, and fewer ships are taking the risk. That has pushed oil prices back over $100USD per barrel.

Most of the focus is on the reaction in the US bond market. The 10 and 30-year bond market in the US surged to 4.96% and 5.37% respectively last week, the highest levels since October 2023 and June 2007.

A part of that move was the pricing in of expected US inflation. The US inflation release showed headline inflation was 3.4% over the year. While monthly core inflation surprised to the upside at 2.4%. Inflation risks, to the upside, demand higher interest rates in compensation.

Producer price inflation was also firm, reinforcing concerns that higher oil prices are feeding into broader inflation pressures. The 2-year yield bore the brunt of the hawkish repricing as markets moved to price in a near-certain Fed rate hike, due this week. Fed funds futures are implying a very high probability (90%) of a Fed hike.

US equities went backwards over the week. Although there was a rally on Friday… There is much to watch in this space. We hope the AI bubble (if it is one) holds off from popping for a little while longer.

Financial Markets

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

In Markets - Return of the bond market vigilantes?

Last week, with the tentative RBNZ MPS glow fading, international developments once again reasserted themselves. The ongoing escalation in the Gulf and push higher in oil combined with a seemingly new-found curiosity around inflation pushing US yields higher alongside some further hawkish commentary from RBA officials dominated the week’s trading activity. Overall, the theme was that of higher and flatter curves with implied rate paths bringing forward and adding to priced tightening in their respective paths. At the end of the week our rates curve was similarly higher and flatter with 2-year IRS marked at 4.05% (+32bp w/w), 5-year at 4.42% (+32bp), and 10-year at 4.74% (+25bp), while the implied OCR path aggressively pulled forward tightening to the October meeting with this closing around 2.92% (+9bp) while the year-ahead August 2027 meeting was seen closing around 3.84% (+35bp).

As noted, the deteriorating situation in the Gulf had seen continued gains in crude with Brent marked at around USD108 per barrel at our Friday close – a lift of around USD13 per barrel, which triggered a rapid reassessment of US market inflationary concerns that when combined with additional bond supply and some mixed signalling around fiscal policy, and including a smaller Treasury buyback, saw rates jump higher. US 10-year bonds finished near 20-points higher on the week at around 4.96% at our close, while sharply weaker Fed Funds futures implied year-ahead cash rates at around 4.46% - some 83-points above the current Fed Funds effective rate, while the priced tightening for the upcoming FOMC meeting this week lifted to around a high probability.

RBA officials were also on the newswires with Sarah Hunter, Assistant Governor (Economic) and Andrew Hauser, Deputy Governor and Deputy Chair of the MPC speaking. Comments continued to note concern over inflation, stating that this remained the RBA’s top priority and indicating further hikes may be necessary. The Australian implied curve lifting through two 25-point moves to a 5% priced cash rate. The market focus moving to US CPI due after our close ahead of some key central bank decisions this week with the Fed and the BoJ. After our close the US CPI core measure printed at 0.3%, 0.1% higher than expected, though in-line for the year at 2.4%, leaving rates to settle a few points higher, with year-ahead Fed Funds now around 90-points higher than the current effective rate, while September meeting pricing was above 90%, delivering Fed Chair Warsh a decision that may be more difficult than what would appear priced, particularly given the shock oil-based nature of the move.

Locally, domestic data was very much secondary in consideration, with comments from MPC member Prasanna Gai perhaps providing some early interest in the week. Gai, who had been thought of as one of the more inflation-focussed members on the committee, especially after the speech delivered in early May of this year, was reported as suggesting that it was plausible that the OCR may already be considered within a neutral zone, noting the central bank was very mindful of the consequences for both price stability and output volatility. Domestically, the implied OCR curve has capitulated to offshore, with Q3 2027 average cash now 66-points higher through the RBNZ’s MPS forecast path as short-swaps dragged this higher. Typically, you would expect the near-term policy path to apply a bit more of a moderating force at the front of the curve, however the sharpness of the move has seen the forced repricing of the OCR path.

The NZ IRS market appeared to trade with a bit of a rush to the exit, particularly in the latter stages of the week, with the front 2-3-year area particularly affected as the moves outpaced those seen in Australia and the US, with for instance the NZ 2-year IRS +32bp, Australian 3-year bonds +26bps, and US 2-year bonds +23bps, with Friday’s NZ move a multi-sigma event. With the weeks spill in the rates market and in light of the cautious MPS the week prior, the RBNZ will no doubt find themselves in quite a position. Past decision making and meeting records would indicate a degree weight is applied to the parts of the remit dealing with avoiding unnecessary instability in output, and the current oil and rates shock may just feed some more weight to their thinking in these areas. We may get an update on their thinking on this in a week or so when Governor Breman is scheduled to deliver an economic update at a business lunch. It is also worth noting that ahead of GDP this week, expected to be around +0.1% for the quarter, the RBNZ GDPNow predictor model lifted for Q2 while the Q3 forecast was reduced by around 0.35%. As for this week, it has the feel that even our GDP data may be secondary in thinking with the international volatility set to continue. Graham Huges – Trader, Financial Markets

In FX – The inflation shocker meets the Warsh wild card

Despite the wild ride in rates markets, the Kiwi dollar largely kept its cool last week. NZD/USD, trading in a 91-point range (0.5798-0.5889), spent most of the period under pressure before staging a late recovery. Early weakness was broadly driven by a sharp rise in oil prices, along with comments from supposed RBNZ MPC hawk member Prasanna Gai that the OCR may already be within the neutral zone. This contrasted with RBA Assistant Governor Sarah Hunter's signal that the RBA may need to hike further, resulting in NZD/AUD selling that saw the Kiwi underperform the AUD by around 40bps. In turn, this drove NZD/AUD to a fresh 13-year low of 0.8181 on Wednesday. Late in the week, the resulting lift in global inflation concerns saw markets bring forward RBNZ tightening expectations, with October hike pricing climbing towards 60% from virtually a 0% chance following the prior week's MPS. This helped the Kiwi outperform on Friday. The move higher in NZ interest rates was significant, with two-year yields jumping 25bps to reach their highest levels since late 2024. Further supporting the hawkish backdrop heading into this week's significant and telling FOMC event, slightly firmer-than-expected US inflation data reinforced expectations that the Fed may need to keep rates higher for longer. However, the reaction function for the Kiwi was largely muted, given the aggressive sell-off in rates already witnessed across Thursday and Friday.

The week ahead, outside of Q2 NZ GDP, is all about a series of key central bank decisions. The BOE, despite the emerging inflation backdrop, is expected to hold rates on Thursday night, with members recently commenting that inflation pressures are largely energy-driven and transitory. Subdued second-round effects and a softening labour market are giving policymakers room to wait before committing to a hike. The BOJ on Friday is expected to lift its policy rate to 1.25%, a move largely telegraphed in recent weeks, with the yen gaining 3.8% against the USD over the past three weeks.

Lastly, a blockbuster FOMC decision will finally reveal the colour of Fed Chair Warsh's feathers. Markets are pricing an 88% probability of a hike, taking the target rate to 4%, but the wild card remains the prospect of White House influence. Historically, it is exceedingly rare to see the Fed Board vote against its Chair. The last notable example occurred in 1986 when Paul Volcker, the "Inflation Shocker", lost a Board of Governors vote 3-4 on lowering rates. The episode famously saw Volcker draft a resignation letter to the President, only to later withdraw it when a dissenting member changed their vote on the proviso of a coordinated international move to lower rates, preserving both the agreement and Volcker's considerable reputation. The irony of that episode should not be lost today, given we are currently witnessing elements of coordinated monetary and fiscal policy action between Japan and the US, alongside the possibility of a split FOMC. History never repeats, but it often rhymes, and it is worth keeping in mind this week. Hamish Wilkinson – Senior Dealer, Financial Markets.

The Week's Key Events

• This week’s domestic star in data is second quarter GDP data on Thursday. We get monthly international travel and migration data, electronic card spending transactions, overseas merchandise trade, selected price indexes and private vehicle registrations. Other quarterly data we get this week is the balance of payments and international investment position.
• Internationally, the US Fed decision is out on Wednesday. Markets are expecting a hike with a high probability. Two more hawkish rate decisions to keep an eye on are the BoJ and BoE.