After months and months and months of waiting, President Trump announced his nomination for the next Fed Chair. And the battle of the Kevins has been won by Warsh. Kevin Warsh is a Fed vet, serving as a board member from 2006 to 2011. A critical period. At the time, and in many of his public comments since, he’s built out a reputation to be an inflation hawk. But his tone softened and he began to advocate for lower rates in November 2024. About the same time that Trump won the election. What a coincidence… Warsh’s newfound stance for lower rates however is at odds with his long-standing public argument for a smaller balance sheet. Either reducing or actively selling Treasury holdings only steepens the yield curve. And higher long-term rates would do little to lower mortgage rates. Will he prove to be just a hawk in dove’s clothing? Or has he fashioned himself a new set of tailfeathers? Time will tell. But coloured by Warsh’s past, markets see him as less supportive of deep rate cuts compared to the other Kevin (Hassett) that was in the running for the top job. The USD rallied big time, with Bloomberg’s DXY printing a near 10% rise since the news broke. Against the greenback, the Kiwi is floating back down to 60c after a stunning rise to the highest levels since last July.

Domestically this week our focus is on Stats NZ’s labour market statistics for the December quarter out on Wednesday. We’re expecting the report to reflect a jobs market that is broadly stabilising. And that’s a welcome change from the softening we saw through much of the past year (see our full preview here). Recent indicators suggest an improvement in labour demand and employment growth. The worst should be behind us. That said, labour market conditions are set to remain soft with a meaningful unwind in spare capacity still a while away yet. Because while our economic recovery may indeed be underway, the labour market tends to be the last indicator to turn.

Still, the December quarter should show the market levelling out. Glimpses of a stabilisation were already seen in the last jobs report for the September quarter. Total hours worked lifted for the first time in nearly two years. Meanwhile employment growth, flat over the quarter, had broken a year-long streak of quarterly declines. Since then, monthly filled jobs data has continued to suggest an improvement in the appetite for labour. Despite some volatility, filled job’s trended higher over the December quarter, up 0.2%. Such a lift however keeps total filled jobs around 1.8% below their early 2024 peak levels. 2026 should see further improvements. But it will still be more of a slow burn in job growth given the lagging nature of the labour market reflecting economic conditions from 9-12 months ago. Which no one needs reminding but wasn’t a great time.

There is a conceptual difference between Stats NZ’s filled jobs data and the Household Labour Force Survey (released on Wednesday). The former is drawn from tax data, and the latter is subject to sampling errors. Despite this, the monthly data does a good job in providing a steer on employment. Accordingly, we’ve pencilled in a 0.3% lift in employment growth over the quarter. Such a result would see employment flat on the year.

The recovery in labour demand is now likely just enough to keep pace with growing labour supply. We’ve pencilled in a 0.3% lift in the working age population over the December quarter. Which when put together, should see the unemployment rate hold steady at its 9-year high of 5.3%.

As always, movements in the unemployment rate on the day will be heavily dependent on changes to labour force participation. Much like the rest of the labour market though, we expect the participation rate to have also found some ground, likely holding steady at 70.3%.

In any case, considerable slack in the labour market remains. And even with improvements in labour demand, such slack is set to keep wage growth subdued. We expect to see a 0.5% quarterly rise in wages, keeping the annual rate steady at 2.1%.

Our forecasts for next week are broadly in line with the RBNZ’s. Stronger readings across activity indicators, alongside last week’s hotter‑than‑expected inflation print, has however seen markets and commentators alike turn their attention to the possibility of rate hikes this year. While we do expect next week’s labour‑market release to show some improvement relative to recent outcomes, the economy still carries a meaningful degree of spare capacity. Spare capacity which will take time to be fully absorbed. We need to see the labour market really turn, not just stabilise, to have confidence in the recovery. We don’t think we’ll see that until the tail end of this year, maybe even early next year. And as such, we remain of the view that rate hikes remain a story for 2027.

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 edge higher

“Over the past three weeks, New Zealand yields have continued to edge higher. Last week, the benchmark 2 year yield climbed to a new cycle peak of 3.155%, surpassing the high reached during December’s mortgage paying surge. The latest push upward reflects the impact of the 4Q CPI release, along with the clear strengthening in high frequency data late last year. That said, early readings from those same indicators published last week point to some softening in January, with confidence measures easing slightly. This week’s 4Q employment report is unlikely to shift market sentiment, given its lagging nature at a time when rate markets are focused on more forward looking signals. Meanwhile, migration and housing, key drivers of previous recoveries, show no signs of revival.

The Kiwi rates market appears positioned for lower yields, yet those declines haven’t materialised. Mortgage related flows remain steady, and the market has shown little appetite to absorb additional supply. These flows are now being joined by momentum accounts that trade trends, adding further upward pressure on yields. However, cross market dynamics are also at play. New Zealand–Australia spreads have narrowed driven by the higher Kiwi leg, making these look increasingly vulnerable to retracement. Markets currently have around +52 bps of RBNZ hikes priced by year end, with the first +25bp move expected by 2 September, ahead of the November election. That pricing reflects a best case scenario, driven largely by a perceived desire/need? to return policy to neutral (around 3.00%) relatively quickly.

For tomorrow’s RBA meeting, around +18 bps of hikes priced in. Markets appear to view early tightening as preventative, reducing the likelihood of back to back hikes later. Only +56 bps of tightening is priced across all of 2026.

Ultimately, central banks can influence demand via monetary policy, but they cannot directly address supply side constraints. In NZ demand will come under pressure as mortgage rates rise and the NZD strengthens, for the NZD just as we approach the key horticultural export season.” Ross Weston, Head of Balance Sheet Management – Treasury.

In currencies, a new Fed chair pushes the Greenback higher

“The focus in currency markets remains firmly on the US Dollar. But just when sentiment appeared completely washed out for USD denominated assets, an intriguing end of week development — the nomination of a new Federal Reserve Chair — injected fresh support back into the greenback’s reserve currency status. At first glance, Kevin Warsh’s nomination seems at odds with Trump’s preference for lower interest rates. Warsh is historically viewed as an inflation hawk and a vocal critic of quantitative easing, arguing that QE distorted asset markets (think New Zealand housing market boom of 2020–22), creating somewhat of an inflation doom loop. However, looking deeper there may be a method to what initially appears to be Trump style madness. Warsh has campaigned on a platform of Federal Reserve reform, which includes reducing the size of the Fed’s balance sheet, cutting staffing levels, and, perhaps most significantly from a structural perspective, redefining who is eligible to lead the 12 regional Federal Reserve banks. Trump believes these reforms will ultimately deliver a lower Fed Funds rate, potentially even beyond his own presidential term. Given the US Dollar’s sharp decline in recent weeks amid the renewed de dollarisation theme, Friday’s initial market reaction was partly driven by fundamentals — a perception of a less dovish Fed under Warsh — and partly by relief from an extremely oversold technical backdrop. With the DXY pressing multi-year lows, and key trend support levels below 96.00, investors eventually stepped back in to buy USD.

From an NZD perspective, last week may prove one of the most technically significant in years for the long beleaguered Kiwi. In December’s FX Tactical, we highlighted several reasons for expecting a higher NZD through 2026, including the need for the broader downtrend structure to break around the 60 cent level. Following trading to a multi-month 0.6093 high on Thursday - despite an arguably less dovish than expected FOMC 10–2 vote split between “no cut” and “cut” - the late week rebound in the USD still saw the Kiwi close the week holding above 60 cents. This weekly close has now all but confirmed a decisive upside breakout in the NZDUSD, with broader upside targets now emerging at 0.6130, 0.6250, and, ultimately, 0.6380. For Kiwi buyers, this now means a change of execution theme of the past few years, and we would now encourage a “buy on dips” mentality going forward. However, at the same time, USD buyers should remain mindful of the numerous risks along the way, particularly given the still negative interest rate carry through the short to mid-point of the NZ / US rates curve structure. With now 50 bps of RBNZ tightening now priced by the end of 2026, there is still a meaningful unwind risk if inflation falls back in line with economists’ and the RBNZ’s forecasts. So, whilst 55 cents is now clearly off the radar, a move above the fabled “Goldilocks” 0.6500 level remains well outside our current galaxy.” Hamish Wilkinson – Senior Dealer, Financial Markets.

Weekly Calendar

• It’s a week of central banks with the RBA, BoE and the ECB set to take the stage…

-The RBA tomorrow will likely be of most interest. Following a healthy jobs report earlier in the month, paired with last week’s hot CPI print, the ante is up for a rate hike from the RBA at their first meeting of the year. Headline inflation rose 3.8% in the year to December, up from 3.4% in the year to November. And even more concerning for the RBA, trimmed mean inflation, their preferred indicator of underlying inflation lifted to 3.3% in the December quarter. Not only is that above their target range, but it’s also above the RBA’s most recently published forecast (3.2%). As such, consensus across economists is for a 25bps hike to 3.85%. Similarly, markets have such a move about 70% priced in. That’s up from around 58% this time last week prior to the hot CPI print.

-The BoE on Thursday instead are expected to remain on hold with the cash rate at 3.8%. Little progress in underlying inflation, along with a stabilisation in their labour market is expected to see the BoE show that they’re in no rush to loosen policy. Overall likely to see the BoE reiterate their stance that “further cuts will be a close call”.

-Similarly, the ECB are also expected to keep rates on hold this week with the rhetoric likely remaining that policy is well placed to respond to forthcoming data. Even though Euro inflation is set to ease further below the ECB’s 2% target earlier this week, stronger GDP growth in the December quarter makes near term rate cuts look unlikely given Philip Lane’s (ECB’s Chief Economist) comments that as long as the economy develops as projected, interest rate changes were unlikely to be on the agenda.

• Domestically the focus is on the kiwi jobs report for the December quarter out on Wednesday. See our preview above but in short, we expect that with the Kiwi economy turning, the labour market will be finding its feet and stabilising. Conditions likely remain soft, but at least the period of deterioration looks to be behind us.
• Finally, we’ll round out the week with US payrolls for January. Overall, the print is likely to show a labour market that is stabilising though still with subpar hiring. Job growth is expected to be broadly flat on the month with just 68k jobs added And the unemployment rate expected to hold steady at 4.4.% The annual rate on earnings however is expected to drop from 3.8% to 3.6% with a 0.3% increase over the month.

See our "Weekly Calendar" for more.