We had a big week of international announcements and data. A lot of it coming from the US…

Highly anticipated trade talks between the US and China seemingly went well with President Trump even rating his meeting with President Xi a 12 out of 10. The two parties have agreed to a one year “truce”, alleviating trade tensions for now. Within the truce, China has agreed to forgo its export restrictions on rare earth metals, buy US soybeans, and undergo stricter export controls on precursor chemicals used in the production of Fentanyl. In exchange, Trump relaxed some of the tariffs on Chinese imports. The average tariff rate on China is now down to 45% (previously 55%). It’s a move in the right direction, and certainly a better outcome than the additional 100% tariff Trump threatened just a couple of weeks ago. But even at 45%, tariffs on China remain at levels that are likely to weigh on China’s growth. And subsequently continues to risk weighing on our own growth and recovery here at home.

Nevertheless, with that ticked off Trump’s list, we hope his attention turns to addressing the ongoing US Government shutdown. With every week that passes, the shutdown is estimated to deduct 0.1% of annualised GDP. And today marks day 33 of the shutdown, with the closure on the brink of becoming the longest shutdown in US history…

Movements in financial markets over the last week however were centred around the US Fed. The 25bps cut to the fed funds rate was as expected. But the decision came with two dissents. Governor Stephen Mirran opted for a 50bps cut – big shock (not). But the Kansas City Fed President Jeffrey Schmid voted for no change. The hawkish dissent was unexpected and seemingly supported by commentary from Fed chair J. Powell. In remarks during his press conference, Powell pushed back on a predetermined 25bps cut in December, commenting that a third consecutive cut was “not a forgone conclusion, far from it”. Such comments saw a swift pare back in expectations for the December meeting with markets going from having over a 90% chance of a cut priced to just 50% priced in. As expected, the pullback saw US rates across the curve jump higher. Both the US 2yr and 5yr lifted ~10bps higher following the announcement and press conference.

Meanwhile in currency markets, the Kiwi lost some strength against the US dollar as expected. Shortly after the announcement the NZDUSD fell from around .5790 to .5752, with further falls to a low of .5715 in the days that followed. Currently the Kiwi Dollar sits in the low .5720’s at time of writing.

The repricing of Aussie rate cut expectations following a hot inflation print also spilt over to our markets. Aussie annual inflation printed above expectations, up 3.2% over the September quarter. The acceleration follows the unwind in energy rebates. The disinflationary force previously provided by goods inflation is also waning. At the same time, there’s persistent strength in services inflation which is still running at 3.5%.

Further confirming that the recent reacceleration is not being driven by one-off increases, measures of underlying price pressures also printed hot. Trimmed mean inflation lifted to 3% on the year, climbing to the top of the RBA’s 2-3% target band. The September inflation update is a hard one to look through, and will have to result in a higher inflation outlook. The RBA expected trimmed mean to fall to 2.6% by the end of the year. That looks unlikely now. Market reaction to the report was swift, with a strong sell-off in Aussie rates as a rate cut this week was priced out. Some local commentators have even called the end of the easing cycle. Kiwi rates rose in sympathy, with the 2year swap climbing about 20bps above the cycle low – although Friday saw some of that lift unwind.

Last week’s moves in Kiwi rates and currency were largely driven by offshore developments. There has been no change to the domestic economic outlook. We still expect the RBNZ to deliver another 25bps at the November meeting.

This week our attention turns to Stats NZ’s suite of labour market data out on Wednesday. We expect that conditions in the labour market loosened a little bit further over the quarter. In some good news, there are signs that the market is beginning to stabilise. 2026 should be a better year. But right here, right now, labour demand is not yet strong enough to absorb the extra supply entering the market. (See our full preview.)

We expect the unemployment rate to increase to 5.3% from 5.2% - the highest in over eight years. Though a key assumption to the rise in the unemployment rate is a continued drop in labour force participation. The participation rate soared to an all-time high of 72.4% in June 2023. A surge in migration supplied much needed work-ready migrants, and a cost-of-living crisis pulled many off the sidelines. But with waning demand, workers have headed for the exits. As such, we've seen a gradual decline in the participation rate. And we expect a further fall in participation from 70.5% to 70.4% - the lowest since Dec 2019.

At the same time, growing slack within the labour market should also see wage growth continue to moderate. We expect to see a 0.4% quarterly rise in wages, pulling down the annual rate from 2.3% to 2.1%.

Altogether the data should reinforce the need for further monetary policy easing. Downside risks to medium-term inflation are growing given the soft labour market and dimming global outlook. We continue to expect the RBNZ to cut the cash rate by 25bps at the November meeting.

Financial Markets

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

In rates, cold water is poured over further central bank rate cuts

“Last week, rates were higher after a few of buckets of cold water were poured over the prospect for further central bank rate cuts. Nearest to home was Aussie CPI, coming in above market expectations and crossing the line in the sand set by Bullock in earlier comments. A hold from the RBA this week is now wildly expected with some calling an end to any further cuts.

Next was a hawkish FOMC statement that a further reduction in December “is not a forgone conclusion – far from it” that pushed up bond yields in the US. Though as anticipated, quantitative tightening has been halted, as repo markets signal that the level of reserves was becoming less than ample. In keeping with the Fed’s example, Canda and Japan also left rates on hold.

NZ in its own limited way, saw a similar theme play out with pricing for rate cuts pared back. Business confidence showing tentative signs of improvement as well as improvements in job ads. It seems the economy has finally found a base and that previous easing is gaining some traction.

Unemployment will be the focus domestically, hopefully topping out this quarter.” Matthew Crowder, Balance Sheet Manager– Treasury.

In currency, the Kiwi faces uncertainty headwinds

“Last week’s Federal Reserve rate cut — the second in as many months — was met with immediate market volatility, but it was the growing internal dissent that truly shaped sentiment. While Chair Powell reiterated that another cut in December is “not a foregone conclusion,” three Fed officials (Logan, Hammack, and Schmid) publicly opposed the move, citing persistent inflation and a resilient labour market. Their remarks sparked a reassessment of the Fed’s trajectory, with bond yields rising and the US dollar firming, particularly against high-beta currencies like the NZD. NZDUSD fell sharply in response, dropping to a low of 0.5714 for the week, as markets priced out aggressive Fed easing and risk appetite waned. Despite some improvement in New Zealand’s domestic indicators, including business confidence, the Kiwi struggled to hold ground amid a hawkish Fed tone and stronger US macro data. The Fed’s decision to halt balance sheet runoff from December 1 also added to the cautious mood, reinforcing the view that liquidity conditions may tighten further. Key support for NZDUSD sits at 0.5685, a level that held into the weekly close and remains pivotal for near-term direction. In contrast, the Australian Q3 CPI surprised to the upside, and with it, reigniting inflation concerns and pushing back expectations for RBA rate cuts. Tomorrow’s Melbourne Cup Day RBA meeting sees the possibility of a 25bp cut largely scratched, whilst further out, the market barely prices just 1 x 25bp cut into the future AU OIS strip. The divergence in rates dynamics between Australia and New Zealand saw NZDAUD drift lower, testing support near 0.8740/50, with multi-year support at 0.8700 now in focus. These levels are critical — if they hold, they could act as a base for recovery should sentiment shift.

Adding to the Kiwi’s challenges, RBNZ MPC member Prasanna Gai highlighted on Friday that the impact of global trade tensions and financial weaponisation, describing them as a “negative demand shock” for small open economies like New Zealand. His remarks, which framed recent global developments as contributing to an “uncertainty trap,” were notably dovish from an RBNZ perspective, suggesting that monetary easing may have been partially offset by defensive behaviour among households and firms. These comments will be important to monitor as the RBNZ’s new governance structure takes effect into 2026, potentially influencing how external members shape future policy debates. This broader uncertainty helped keep downward pressure on the NZD into the weekly close, reinforcing the cautious tone across NZDUSD and NZDAUD.

That said, a lot of negativity is already priced into the NZD, and with key support levels still intact, the Kiwi may be poised for a bounce if upcoming data surprises to the upside. Think of it like a cake that’s been sitting in the oven through a long summer — it may look overdone, but the base is still solid. If the right ingredients — stronger labour market data, a pick-up in high frequency economic data points, and a likely freshly baked dovish Fed Chair — are added during the extended summer policy break, there’s still a chance the Kiwi could rise and surprise to the upside. But for now, the market remains cautious, watching closely for signs of life beneath the surface.” Hamish Wilkinson– Senior Dealer, Financial Markets.

Weekly Calendar

• Domestically, labour market data is the focus and due out on Wednesday. Market conditions are expected to have loosened a little further over the September quarter. Employment was likely flat, and still not strong enough to absorb growth in the working age population. The unemployment rate is expected to increase to an eight-year high of 5.3%. The data is a key release ahead of the RBNZ's November meeting. Also out on Wednesday will be the RBNZ's bi-annual Financial Stability Report.
• Across the Tasman, the RBA will announce their latest policy decision. But after the September quarter inflation report, pricing for a cut has been all but taken out for this meeting. Some local commentators have even removed any further cuts next year. The strong CPI outturn raises the starting point for the RBA's inflation outlook. New projections will be released at this week's meeting. And will also have to incorporate fewer rate cuts which will weigh on the growth outlook. Commentary by the RBA will be key.
• In the UK, softer-than-expected economic data in recent weeks has upped the chances of a rate cut from the Bank of England. However, the market widely expects the bank rate to remain unchanged at 4% as inflation is 4.1% - double the BoE's target. The BoE may not cut again until a clear downtrend in inflation emerges. The BoE will also likely hold off on delivering further easing before the UK Budget is announced at the end of the month.
• The US government shutdown continues into its fourth week and continues to impact data releases. Subject to a resolution in the shutdown, nonfarm payrolls report for October is due to be released at the end of the week. It's estimated that payrolls would have increased by about 30k-60k jobs, and the unemployment rate climbing to 4.4%-4.5%. This will be the second payrolls report delayed by the shutdown, as September data was also not released.

See our "Weekly Calendar" for more