- The focus remains on U.S. trade policy as the August 1st deadline approaches. There’s been meaningful progress, with major deals announced from Japan and the EU over the last week. But even as tariff rates ease from their Liberation Day highs, we’re still heading into a world that’s less open than we’ve seen in the last century.
- Our Chart of the Week looks at weakness in domestic inflation. Construction costs in particular have been growing at lower rates reminiscent of the GFC. Administered inflation, frustratingly, remains elevated.
- It's one of our favourite times of the year where we've done a deep dive into the performance of our regions. On average economic scores continued to defrost across the motu. But our regional heatmap is still mostly flashing 3s and 4s out of 10.
The next tariff deadline looms. August 1st is now just around the corner. And it’s the date marked in our calendar where we’re set to see Trump’s vast number of reciprocal tariffs applied onto US imports. Though slipping in before the curtain falls, more trade deals surfaced over the last week.
Among them, Japan and the US revealed an agreement that sets Japan’s reciprocal rate at just 15%. That’s down from its “liberation day” rate of 23%, and well below the more recently threatened rate of 30-35%. But the real headline was that the 15% rate would also extend to automobiles and car parts, rather than facing the universal 25% levy on the automotive sector. While in exchange, Japan is set to further open its economy for US imports along with investing $550bn USD into the United States.
And after months of difficult negotiations, the EU and US finally announced a deal over the weekend too. Like Japan, the EU will now receive just a 15% tariff rate that will also extend onto the automotive sector. While again, in exchange, the EU is set to invest $600bn USD into the United States and zero tariffs on US exports.
Despite the progress made and additional trade deals secured, this Friday will still mark a significant step up from the baseline10% tariff all countries have faced. But at the very least, it’s clear that the worst appears to be behind us in terms of uncertainty and erratic policy shifts. That alone should help businesses move forward from here.
Domestically, our focus was on the Kiwi inflation print last week. As expected, Kiwi inflation accelerated over the June quarter. Annual headline inflation rose to 2.7% from 2.5%. It’s a move in the wrong direction. But context is key. A strengthening in imported inflation is driving headline higher. But domestic price pressures, on balance, continue to cool. Yes, stubborn inflation persists across administrative prices, from council rates, energy and insurance costs. But these are all areas that largely fall outside the Reserve Bank’s control. Meanwhile, the interest rate-sensitive components of the consumer price basket remain notably weak (see our Chart of the Week for more).
So, while headline inflation may be rising, the underlying momentum is softening. And that distinction is crucial for the Reserve Bank. Spare capacity within the Kiwi economy is keeping downward pressure on domestically generated inflation and is set to keep inflation within the RBNZ’s target band over the medium term. And overall, with core inflation contained and interest rate-sensitive components of the CPI basket still weak, the June print reinforces the case for an August rate cut. And rightly so. Because the Kiwi economy still isn’t where it should be…
We recently conducted our annual deep dive into the regions and found that while most regions are performing better than last year, they’re still far from their best. The average score across the motu lifted from a 3 out of 10 to 4. The full report is well worth a look at. It’s one of our favourites to put together and is packed with insights from our business bankers across the country. But summing it up, the South Island continues to outperform the North. Otago joined Southland as the top two performing regions, with activity boosted by a bounce back in tourism. While Auckland’s activity is still weak, despite strong population growth. And for different reasons, economic scores for Northland, Gisborne and Taranaki deteriorated. Meanwhile, Wellington is thawing from its Jack Frost score of just 2 last year.
Without a doubt, it’s still tough for many to navigate the tumultuous economic environment. And there’s now an added challenge of a tariff-induced slowdown in global growth. The good news is that interest rates have fallen a long way from this time last year. There’s a Nazaré-type wave of mortgage refixing due. The move onto lower rates should help improve household disposable incomes, boosting consumption, supporting the housing market and wider business activity. But we may have to wait until summer for things to heat up.
Financial Markets
The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.
In rates, lower inflation clears the way for an August rate cut
“Interest rates in New Zealand continued to fall last week. The main factor holding back a potential rate cut in August was the inflation data for the second quarter. That data came in lower than expected, which cleared the way for a rate cut. Markets are now pricing in about an 80% chance that the Reserve Bank will lower rates in August. Short-term interest rates are well anchored, but longer-term rates have been more volatile.
Locally, attention is shifting to what the RBNZ might do after the August meeting. Right now, markets expect a hold in October, and a rate cut in November. A recent speech by RBNZ’s Paul Conway noted recent inflation is in line with their expectations. The next key data point is unemployment.
In Australia, the RBA remains cautious about easing rates further. Despite some weak job numbers and monthly inflation figures, the Governor emphasized that they’re focusing on the quarterly CPI data.” Matthew Crowder, Balance Sheet Manager – Treasury.
In currencies, trade deals are supporting risk sentiment
“The Kiwi dollar has felt fairly directionless over the last couple of weeks, with the US dollar holding ground, and uncertainty around tariffs continuing to muddy the waters. This started to change a little last week, as the deals have begun to roll in, including a crucial one between the US and EU, which was announced early this morning. The Kiwi opened last week at 0.5964, with a mild upswing to 0.5080 ahead of our Q2 CPI print, which surprised to the downside. The Kiwi then slipped to 0.5940, but found renewed favour mid-week as the US dollar fell, and trade deals started to roll in. The risk on mood helped to buoy the Kiwi back above the 0.6000 level, touching a high of 0.6056. Equity markets also enjoyed a risk positive mood for the best part of the week, as companies posted better than expected earnings and outlooks, despite tariff uncertainty. The ECB kept their interest rate on hold last week, as expected. They are looking more likely to have completed their cutting cycle but are keeping the doors open to see what comes on the back of tariff deals. The NZDEUR had a brief dip below 0.5100 to
0.5082 but recovered to 0.5125 to close the week. We may see a test of 0.5100 again this week, with the Euro likely to open the week strong. The US dollar closed the week on a small upswing, as traders pared some of their bets around Fed cuts, following an unexpected drop in US jobless claims last week. The week ahead is a busy one, with rate decisions from the Fed, BoJ and BoC, who are all expected to hold. There is June US PCE data on Thursday and July’s nonfarm payrolls on Friday night. The Fed and late week data prints are likely to be key to understand if a September Fed rate cut becomes a truly live possibility – and with it, determining shorter term US Dollar direction. Closer to home we have Aussie CPI, which is fairly critical for a clue on direction from the RBA, who were dismissive of the recent decline seen in the Aussie labour market. With NZDAUD trading in the familiar 0.9130-0.9170 range, we may get some further direction in the week ahead, with both antipodean currencies likely to fair well at the start of the week on the back of the US-EU trade deal.” Mieneke Perniskie, Trader - Financial Markets.
Weekly Calendar
- Across the ditch, Aussie CPI data is due out. Inflation likely edged down to 2.2%yoy over the June quarter, closer to the bottom of the RBA's 2-3% target band. Monthly trimmed-mean inflation, which strips out fuel prices and electricity bills, looks set to pull back top 2.7%yoy from 2.9%yoy. Disappointed domestic demand and a further cooling in underlying inflation should open the door for the RBA to deliver a rate cut in its August meeting.
- The latest PMI data for China are due this week will likely signal the beginning of a slowdown in growth. High-frequency indicators are showing tentative signs of exports slowing, which would dampen production. The manufacturing PMI may slip deeper into contractionary territory. Non-manufacturing PMI however may seen a lift off the back of a holiday-led pick up in services. Growth in China is expected to decelerate over the second half of the year.
- US payrolls for the month of June is due out this week. Job growth is expected to slow to 110k from 147k as the recent boost in state and local government hiring fades. The unemployment rate is expected to lift to 4.2% from 4.1%.
Central banks announcements are a key focus this week:
- The US Federal Reserve will likely hold rates this week, but may set up a rate cut in September. Tariffs are expected to lead to a lift in inflation, but given the revised rates following trade negotiations, the impact may prove to be transitory. The risks to growth and the labour market argue for further rate cuts from the Fed.
- The Bank of Canda is expected to hold the policy rate at 2.75% given ongoing tariff uncertainty. The main concern of the BoC is persistently elevated core inflation, averaging at 2.6% for the last three months.
- The Bank of Japan is set to keep rates unchanged this week. Whilst the bias for monetary policy is still tilted toward further hikes given solid inflation, mounting fiscal worries complicate things. A rate increase at this time may fuel JGB selling. Indeed, the murky political backdrop risks a longer hold from the BoJ.
See our Weekly Calendar for more.
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