It's been just a little over a fortnight since the RBNZ delivered their first cut, and we’re already seeing a huge improvement in sentiment across businesses and households. Confidence and hope for better days is returning. That’s the feedback we’re receiving as we’ve travelled across the country to see a number of our clients. Now, we are also seeing the uptick in the confidence numbers. Last week, ANZ’s latest survey of business confidence rose an impressive 23 points to a decade high of +51 in August. On top of that, firms’ expected own activity jumped 21 points to a seven year high of +37. According to the survey, two thirds of the responses came in prior to the RBNZ’s rate cut. But it seems the RBNZ’s dovish pivot in July had already caused a shift amongst businesses. Because retail rates had already fallen as wholesale rates fell in anticipation of RBNZ rate cuts. The August 25bps cut was just the cherry on top.

Looking beyond the headline confidence numbers, other indicators within the survey also lifted. Expected profitability, investment intentions, and employment intentions all picked up out of negative territory.

Consumers were also feeling the relief of RBNZ rate cuts and decreasing inflation. Consumer confidence lifted 4 points over August to 92.2. And while that still sits below its 10-year average, it is certainly an improvement from the trenching low of 73.8 at the end of 2022.

Looking ahead, confidence should strengthen from here. Though perhaps not in such a big leap as in August. The excitement of the RBNZ first rate cut will settle. Still, with 275bps of cuts to come, we can’t blame businesses and households for feeling a lot better. We’re excited for them.

We simply have a brighter outlook for 2025/26. But grey clouds still hover above 2024. The current environment is still tough, as reflected in firms’ experienced activity which rose just 1 point to -21. And given the strong correlation of firms past activity to GDP, actual better days are probably still a while off. We’re still expecting to see the kiwi economy contract over the June quarter, along with further subdued growth for the remainder of 2024.

The massive lift in confidence, in our view, lowers the chance for any 50bps cuts, as currently priced in the market. Our view is unchanged; we expect to see a steady glidepath down in the cash rate. We forecast another eleven 25bp cuts to 2.5% from the RBNZ into 2026.

Another piece of good news here at home was the uptick in building consents. After falling 17% in June, residential building consents lifted 26% over July. Despite the increase in July, consents are still down 22% over the year. Building consents are down 35% and 27% for Wellington and Auckland respectively. We hate to see it. But we aren’t surprised by the numbers. We desperately need a solution to housing supply. The chronic shortage of supply is the driver behind our housing crisis. Not demand.

Financial Markets

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

In rates, the market traded in tight ranges

“Kiwi rates ended the week higher and steeper but for most of the week the market was quite subdued and traded in fairly tight ranges. The biggest domestic development last week was the ANZ business confidence survey showing a huge bounce in forward looking confidence. This makes the chance for 50bps cut in October look more remote and saw the 2-year swap rate nearly getting back to up to 4%.

Outside of big jolts in high frequency data, for the time being our short end remains a function what the Fed does or is likely to do. Non-farm payrolls at the end this week and US CPI the following week could drive a fair amount of volatility in global rates markets in the lead up to the September meeting. Though we will likely see a steady stream of Fed Speak at least partially telegraphing the move.

One key local factor for rates will be the degree to which mortgage holders take up longer fixed term rates. Two of the big 4 banks took their 2-year rate home loan rates another notch lower last week, making it more attractive again to fix for longer. So far this year most mortgage holders have been fixing short, a significant shift into the 2-year tenor would reintroduce material pay-side flow from balance sheets. A significant change to dynamic which has been dominated by offshore receivers.

No major data releases locally will see Kiwi rates continue to take their cue from offshore and will likely be a quiet start with a US public holiday today.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, the Kiwi dollar is well supported by the soft Greenback

"The Kiwi dollar outperformed many of its peers last week, however it was largely a US dollar story, rather than a plethora of positivity around are own economic outlook, with the exception of the Business Confidence Survey, released by ANZ. The Kiwi opened last week close to the 0.6125 mark, before touching a low of 0.6197. The US dollar was under the pump for most of the week, as investors cemented their expectations that the Fed will go ahead with the beginning of their cutting cycle this month. Various comments from Fed officials last week helped to bolster the view. As the week wore on, the NZ Business Confidence survey gave another boost to the Kiwi, after coming in at its strongest level in a decade. The Kiwi popped to a high of 0.6293, before overbought indicators made traders think twice. This move then unwound into the 0.6250 level again. We have a smattering of data out this week, but probably the key one for the US Dollar is US-non-farm payrolls, the last piece of the economic puzzle before the Federal Reserve meeting in a couple of weeks. The Fed has emphasised concerns around the US Labour market. We expect that the Kiwi will be largely range bound this week, with a potential unwind in to the 0.6180 level before resuming a run higher, potentially into the 0.6300 level. NZDAUD has been largely range bound in recent weeks, with the NZDAUD opening today at 0.9236." Mieneke Perniskie, Trader, Financial Markets.

The week ahead

• Here at home, the data watching continues ahead of the Q2 GDP release later in September. This week, the June quarter building work put in place is due out on Friday. Building activity contracted 4% in the March quarter, and it's likely we see another decline in the three months to June. Tight financial conditions continue to weigh on the construction industry.
• US August payrolls print is the key economic event this week, in light of Fed Chair Powell's recent appearance at Jackson Hole. Jobs growth is expected to have picked up the pace in August, increasing by 165k following June's 114k gain. Should the participation rate remain unchanged at 62.7%, the unemployment rate will likely rise to 4.3% from 4.2%.
• Across the Tasman, Aussie GDP data for the June quarter will likely show the economy grow 0.2%. Soft consumer spend and declines in construction were likely the biggest drags. The quarterly increase is faster than Q1's pace, but given the context of surging population growth, economic growth in Australia remains very weak. On a per-capita basis, GDP is expected to decline for the 6th straight quarter.

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