The US rodeo continues! After an already big week of data releases last week, the main acts – the US election and the Fed’s rate decision - will take the stage this week. With just two days to go until the election, current polls still show the presidential race to be neck-and-neck. In the final stretch it’s going to come down to the swing states.

We get asked a lot, “What will it mean if Trump gets in?”, to which our favourite answer is “We don’t really know.” Broadly speaking we can make assumptions on what he represents. As a republican, we can expect a pro-growth and inflationary environment which saw equities and rates take off back in 2016. But given what markets know about Trump now, we’re not sure we’ll see the same reaction.

What we do know is there’s going to be volatility in the near term as markets adjust to the electoral outcome. But for us, what’s most important for the US economy is the Fed. In the medium term, what the Fed does is going to be the main driver for rates, equities and the US dollar. And conveniently we won’t have to wait long to hear from the Fed post-election. Meeting a day later than usual, (thanks to the election) the Fed is expected to deliver a 25bps cut, a more “incremental” step from the 50bp cut in September. Despite kicking off their cutting cycle with a bang, strong economic data and several Fed officials support a more gradual pace of easing.

Here at home, we’re getting ready for another key data release ahead of the RBNZ’s November meeting. On Wednesday, Stats NZ will provide an update on how the Kiwi jobs market fared over the September quarter. And we expect a continued loosening in labour market conditions. (See our full preview). By our calculations, the unemployment rate likely lifted to 5% from 4.6%. That would mark the highest rate since the end of 2020.

Previously, the rise in unemployment had been a consequence of a migration-led expansion of the labour force. Employment growth remained strong, albeit not strong enough to keep pace with growth in labour supply. But as expected, there has been a shift in the narrative. Stats NZ’s monthly employment indicators are showing either declines or flat growth in the number of jobs. Over the September quarter, monthly filled jobs (seasonally adjusted) averaged a 0.7% decline. Employment is quickly losing its shine and will drive further slack in the labour market from here.

Everything washes out in wage growth. And wage growth is cooling. The private sector Labour Cost Index (LCI) hit a series high of 4.5% in early 2023, as rising inflation expectations and labour shortages bolstered wage demands. But medium- and long-term inflation expectations, are now well-anchored at 2%. We expect to see a 0.7% quarterly rise in wages, pulling down the annual rate to 3.5% from 3.6%.

The jobs data is the final key national statistic before the November MPS. Our forecasts are largely in line with the RBNZ’s latest projections. With the 2% target inflation rate well within reach, we believe the RBNZ needs to get the cash rate below 4% ASAP. We continue to expect a 50bp cut at the RBNZ’s final meeting for the year. And potentially a third 50bp cut in February. Market traders are more eager for the RBNZ to pick up the pace. Current market pricing shows that embers of a 75bp cut are still glowing red. However, we think we would need to see a far softer jobs report to justify such a supersized slash to the cash rate.

Financial Markets

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

In rates, it’s a holding pattern environment ahead of a big Wednesday.

“NZ rates ground higher last week with a small upside bias, but largely remain in a holding pattern ahead of big Wednesday. The benchmark 2 year swap in a 3.50-3.75% range while the curve steepening theme has stalled after the 2s10s has steepened +50bp over the past 3 months. Expect markets to remain jittery and subject to flow until the US election result is known, while the FED meeting at weeks end has a -25bp priced even with a very weak US employment report over the weekend. The NZ employment report may be a sideshow on the day, it will hold importance for the short end if it comes in very weak. The RBNZ’s weak at the time 5.00% unemployment forecast is now supported by market commentators and would have to come in much higher (5.50%?) to support a -75bp cut in November, but equally a weak print may support a lower OCR end point.

There are currently -56bp of cuts priced into November, and -100bp priced in by February. That will take the OCR to 3.75%, with a further -25bp priced into April and the next cut not fully priced until August 2025, down to 3.25%. The NZ terminal rate pricing continues to hover around the 3.00% mark, where that settles is highly data dependant with market forecasters widely dispersed on that end point. Given the speed and magnitude of the front-loading of cuts the bias is towards a higher than 3.00% OCR all else equal. Watch short end funding spreads, the spreads between 3-month OIS and 3-month Bank Bills. Since June they have widened 10bp to +17bp, now sitting at around “normal” levels after a long period of excess cash. That premium compounds up the curve to give us term rates, so worth bearing in mind when looking at historic levels.” Ross Weston, Head of Balance Sheet – Treasury.

In currencies, A big week for the US Dollar may hit the Kiwi.

“With Harris and Trump currently neck and neck in the US Election race, there is plenty of potential for volatility in the week ahead. Wednesday is the day for the US election outcome. In early trading this week we have seen a bit of a pull back in the US Dollar, following news that Harris is leading one of the ‘swing states’. Ultimately a Trump win will likely see a bit of a push higher in the US Dollar and all of their major equity indices, whereas Harris is the opposite. Rightly or wrongly, Trump is perceived as being ‘better’ for the US economy albeit in an inflationary manner (corporate tax cuts, Tariffs etc), and this rhetoric will remain in play this week. We may see a fresh surge in the US dollar. Either way, we are likely to see a flow through for the Kiwi dollar. It is also a big week on the Central Bank front, with rate calls from the Fed, Bank of England, and the RBA all due out this week. And on the local data front we have the final piece in the puzzle ahead of the RBNZ’s rate decision later in the month, with the Q3 labour market report due out from Stats NZ on Wednesday morning. We are expecting further deterioration in the labour market, with our own Economics team anticipating an increase to 5.0% for our unemployment rate. So what does all this mean for the Kiwi dollar in the week ahead? We are picking a likely move lower. Whilst we have found some support around the 0.5940 level, the local data story is unlikely to see much to drive fundamental support for the Kiwi. If the US dollar ends up underperforming this week, then a run higher to 0.6020 for the Kiwi is not off the cards, but that would be short lived. The relative underperformance of the Kiwi economy compared with our peers, and the RBNZ rate cuts that are priced in, don’t support the Kiwi dollar in the medium term. The Fed’s rate call will also have an impact on our own rates market. The Fed are broadly expected to deliver a 25bp cut, which will probably have minimal impact from a currency perspective, but the tone of the accompanying statement will be key. The Kiwi/Aussie cross is still trading within the 0.9000-0.9100 range, which is very familiar territory. Tomorrow we hear from the RBA, who are broadly expected to keep their cash rate on hold, with a more hawkish bias as they continue to be concerned about a potential resurgence in inflation. This combined with our labour market report this week, may see the NZDAUD cross lower, but we have been saying that for a while now…Expected range this week: 0.8980-0.9120. Mieneke Perniskie, Trader - Financial Markets.

The Week Ahead

• On the domestic data calendar, the September quarter labour market report is the key release. The market consensus is for a lift in the unemployment rate to 5.1% from 4.6%, led by a drop in employment over the quarter (see above for our preview). The RBNZ will announce release its six-month update of the financial system in the Financial Stability Report.
• Across the Tasman, the RBA is expected to keep cash rate unchanged at 4.35% Inflation has fallen back within the 2-3% target band, but that's largely due to lower oil prices and government subsidies. The labour market also remains robust. The case for a pivot in policy toward rate cuts is not yet strong enough.
• Two major events take place in the US this week:

- US election: Voters head to the ballots, but it will still take some time before the final outcome will be known. It's proving to be a very close call. The outcome will come down to voting in the swing states

- November FOMC meeting: The Fed is expected to cut rates by 25bps, following the 50bp cut in August to kickstart the cutting cycle. Since the August meeting, several Fed officials have signalled their support for a more gradual easing cycle on the way to a more neutral policy setting.

• The Bank of England will announce its latest policy decision this week, which will likely be a 25bp cut to 4.75%. Data since the BoE last met shows a continued cooling in price pressure, supporting the case for further rate cuts. The BoE's updated forecasts will also likely show higher growth and medium-term inflation due to the loosening in the UK budget.
• China's October trade data will likely show weak export growth due to soft external demand, and a decline in import levels due to soft domestic demand. It is still too early for the stimulus package - announced in late September - to have made an impact on the economy.

See our Weekly Calendar for more data releases and economic events this week.