It was all about the US last week, with a lineup of tariff announcements, pivotal data releases, and a Fed rate decision. Starting with the end of the week, US payrolls disappointed big time. Market expectations were for a 100k increase in jobs over the month of July. The actual print came in well below at 73k. But the real kicker were the downside revisions to the past two months. June’s total was downgraded from 147k to just 14k – the lowest in nearly 5 years. And that follows May’s downgraded 19k gain. Altogether, nearly 260k jobs were stripped out of the past two months. Of course, President Trump has labelled the data “rigged” and called for the head of the stats bureau to be fired (hasn’t someone told him The Apprentice was cancelled 8 years ago). But taking the data as is, this is the slowdown that many had been expecting. Cracks were already starting to show earlier this year, as jobs growth slowed. The US labour market is not yet in a crisis, with the unemployment rate at 4.2%. But those cracks are widening, and hiring momentum has clearly stalled.

US Federal Reserve voted 9-2 to hold rates steady last week. Financial market reaction to Powell’s press conference suggests the head honcho came out hawkish. The Greenback strengthened and bond yields climbed as Powell pushed back on market pricing for rate cuts. But it does seem that the FOMC is setting the stage for a rate cut in September – the first rate change this year. The statement was arguably dovish, with officials downgrading their view of the US economy. And the fact that two committee members dissented in favour of a rate cut is noteworthy. It’s the first time since 1993 that two Governors voted against a committee decision. The cynic will point out political intentions as dissenting Governors Waller and Bowman are both in the running for the top job when Powell vacates his seat in May. But the idealist will say that this double dissent marks a growing urgency within the central bank to lower rates. And data like the July payrolls certainly helps Camp Cut. Indeed, the post-Fed moves in the US dollar and bond yields were reversed following payrolls, and the market has returned to pricing in 22bps of cuts in September.

Turning to trade policy, the White House was busy issuing new tariff rates, effective August 7. Countries with a trade deficit with the US face a minimum 10% tariff, while 15% applies to countries with a trade surplus. Australia fits into the former, and us the latter. The playing field is no longer even with our direct competitors. Kiwi meat and wine are at a slight disadvantage to our Antipodean counterpart. One consolation is that the tariff rates for emerging Asia were significantly reduced from the 30-50% rates set on Liberation Day to 10-20%. Our trading partner growth may not be as weak as initially forecast. And as we’ve previously argued, the indirect effect of Trump’s tariff agenda is more important for the outlook. So while the direct effect of the new rules has deteriorated, it may not be so bad in the grand scheme of things. While there’s more clarity today, this is unlikely the end to the tariff trade saga. We expect some retaliation. Our own Trade Minister is seeking a review.

Bringing it back home

With all that’s happened last week, we’ve seen some action in Kiwi rates. We‘re anticipating a strong bull steepening in the Kiwi rates curve. What’s that? Well, we expect rates to rally, hard, (so interest rates fall… when the price of bonds increase the interest rate decreases), led by the front end. We expect the RBNZ to be forced to cut more than they (and the market) are expecting. Our call for cut to 2.5% (not 3%) will drag short-dated rates (like the 1 and 2 year rates) lower. It’s a strong bull steepening. The market is slowly coming around to this view, and has been for a while. Offshore data is also supporting our local view. Inflation in Australia is weaker, revitalising debate around a lower RBA cash rate. And weaker US payrolls, with huge downward revisions, reopens the door for the Fed’s “too late” Powell to cut again. The BoC was also unmoved last week, but calls for cuts are getting louder and louder. When you see other major economies becoming more comfortable with the inflation environment post US tariffs, it settles the nerves of some of the RBNZ MPC members. So while our wholesale rates have drifted lower in recent weeks, the next big move could be lower, and steeper.

Here's some "good news". The Kiwi dollar has just dropped below 60c to the USD. Since recording a brief low of 55c in April, the Kiwi has been trading around 60c. But just recently, we've seen a move to 59c. That's helpful for our exporters faced with a 15% (not 10%) tariff on our goods headed to the US. So our currency has weakened, making Kiwi exports cheaper to foreigners, exactly as the currency is supposed to do. We like it.

This week, the focus returns to domestic data. And there are two key releases. First, June quarter jobs report. We expect the labour market to loosen further. The economy may have started to turn, with output expanding over the summer months. But the labour market lags the broader economic cycle, and the appetite for labour remains soft. Jobs growth looks to have weakened over the quarter. We have pencilled in a 0.2% fall in employment over the quarter. Annually, employment growth likely weakened further to -1%. By our calculations, the unemployment rate is set to hit the highest level since December 2016, rising from 5.1% to 5.3% - provided the labour force participation rate eases to 70.7%. Growing slack within the labour market should also see wage growth continue to moderate. The balance of power has shifted back to the employers. We expect to see a 0.7% quarterly rise in wages, pulling down the annual rate from 2.5% to 2.3% (see our full preview here).

Then on Thursday the RBNZ will release its survey of inflation expectations. Inflation is heading higher. The near-term inflation expectations will likely follow. It’s a move in the wrong direction. But headline inflation in the high 2s would be an easier pill for the RBNZ to swallow if the longer-term inflation expectations remain close to 2%. Thankfully, details within the latest inflation report give us confidence that long-term price pressures remain well contained.

Financial Markets

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

In rates, we’re in no-man’s land

“NZ rates bobbled toward the bottom of the recent trading range last week. The 2-year swap in 3.10-3.30% range, and last week averaging around 3.16%. The curve chape also remains relatively constrained. Kiwi rates holding lower even in the wake of some better news on US tariffs and the FED taking a wait and see approach to monetary policy. That wait and see will be tested given the significantly weaker US employment report on Friday night. As a result, the chance of a cut by the FED in September increased from -10bp to -22bp, the US 2 year falling -28bp and the 10 year -16bp post data release. A total of -61bp is now priced by December into the US down from -33bp pre data release.

NZ market pricing has an 84% chance (-21bp) of a cut priced into the August RBNZ meeting. Beyond that it is far more interesting. The pause by the RBNZ in July leading the market down the “pause-cut-pause” operating model. August has -21bp priced, Oct -26bp, Nov -35bp, and Feb -42bp. Whereas the RBNZ, and other central banks, feel more data decision driven which in NZ has been soft. That suggest if that data weakness continues, they cut by more than is priced. However, the data induced weakness in the USD over the weekend not seeing a huge rebound in the NZDUSD (yet?), which should be the transmission to lower tradable inflation.

This week expect a turbulent start to NZ rates after the large moves lower in US rates. The low end of recent ranges to be tested and the curve likely to flatten given the short ends resistance to head lower. Those lows could be threatened if Wednesdays NZ employment data is weak (5.3% expected by market). A 5.5% unemployment rate or higher will likely see more than -50bp of cuts priced. While a lower than 5.1% will likely see an equal reaction higher given the low range starting point. That aside, homeowners/businesses are struggling under the weight of hefty necessity spending. The weight of that spending is not being offset of OCR reductions yet, so don’t expect the rates pendulum to swing back in the higher rates direction just yet.” Ross Weston, Head of Balance Sheet Management – Treasury.

In currencies, it’s Trumponomics – you can’t aways get what you want

“Following a series of inflation, earnings, trade, and monetary policy updates that extended recent US Dollar strength for much of the week, Friday night’s explosive Non-Farm Payroll (NFP) release abruptly halted the broader month-long US Dollar rally. Despite denials, dismissals, and public statements from the US President—including the firing of key statistical department staff—investors have swiftly shifted focus toward the growing risk of a US recession. This pivot has led to a significant recalibration of interest rate expectations in the months ahead.

Prior to the NFP release, on the back of last week’s FOMC meeting and PCE data, US interest rate futures priced in less than a 36% chance of a rate cut at the September FOMC meeting, with just over one full 25bp reduction expected by Christmas. By Saturday morning, however, markets had moved to an 88% probability of a September cut, with increasing expectations that the Fed may ease policy by a total of 75bp before the arrival of the jolly guy in red. Ironically, despite the President’s insistence that the employment data is “fake news,” it appears he may get his wish for lower interest rates. A divided Fed now has the economic justification—slowing employment and thus economic growth—to begin easing monetary policy, even as the President continues to tout the strength of the economy under his leadership.

For the New Zealand Dollar, offshore developments drove a full-circle 4.1% trading range over the week. After briefly touching a multi-month low of 0.5858 (a downside target highlighted in our recent FX tactical), Friday night’s drama saw NZDUSD rebound back above 0.59, returning to more familiar territory.

The upcoming week features a lighter offshore data calendar, but investors will closely monitor how risk assets respond as markets reassess global growth and interest rate trajectories. With an 84% probability now priced in for a 25bp RBNZ rate cut on August 20th, Wednesday’s Q2 New Zealand employment data will be a key event—offering confirmation and deeper insight into what may follow in the spring and summer.

As of this morning, OIS pricing suggests a terminal OCR of approximately 2.81% by May 2026. Given last week’s offshore developments and continued softness in recent domestic high-frequency data, we are quietly—yet more confidently—watching for a 2.5% terminal OCR to be priced in over the coming days or weeks. From a technical perspective, with NZDUSD hovering near the lower end of its 0.5850–0.6150 range, any upside surprise in the unemployment rate could trigger another attempt to breach support levels at 0.5850/60. For the Head of Stats NZ however, should this be the case, then hopefully the same fate of their US counterpart does not playout here!” Hamish Wilkinson – Senior Dealer, Financial Markets.

Weekly Calendar

• Here at home, this week will see two pivotal data releases ahead of the RBNZ's August policy decision. First, the June quarter jobs report will likely show further weakening in the Kiwi labour market. The unemployment rate is expected to climb to 5.3% from 5.1% following a fall in employment. On Thursday, the RBNZ will release its survey of inflation expectations. Near-term expectations will likely print higher, following headline inflation. But continued easing in domestic inflation should see the longer-term expectations remain close to 2%.
• The Bank of England meets this week, and are expected to deliver a 25bps cut to 4%. The BoE faces a tough balancing act as inflation has recently printed to the upside while the labour market and wage growth continue to cool. Given high uncertainty, the BoE will be cautious in signalling further rate cuts, instead reiterating that easing will be "gradual and careful".

See our Weekly Calendar for more.