Since the RBNZ paused in July there were three key data releases we knew would be carefully picked apart before the August meeting. The first was June quarter Kiwi inflation, which showed weak underlying price pressures, despite a lift in the headline rate to 2.7%. Then last week, we saw the remaining two key data prints: the Kiwi labour market report and the RBNZ’s survey of inflation expectations. Both of which support the case for further rate cuts. A 25bps cut next week to 3%, followed by an eventual move to 2.5%.

At first glance, the June jobs report looked a bit better than expected. But under the microscope, the Kiwi labour market is clearly soft. The unemployment rate came in at 5.2%, slightly below our forecast of 5.3%. But it’s the deeper slide in labour force participation that kept a lid on the unemployment rate. From (a downwardly revised) 70.7% to 70.5%, the participation rate has dropped to a four-year low. That in itself is a sign of a weak labour market. People are leaving the labour market because it is simply not as attractive as it once was. In fact, the labour force shrank over the year. That doesn’t happen often. The 0.4% decline is the deepest since March 2013. Labour demand is soft. The June quarter recorded a 0.1% decline in employment. And the 0.1% gain in the March quarter was revised to flat. On an annual basis, employment growth is running at the weakest rates since the GFC.

The underutilisation rate – a broader measure of untapped labour market capacity – rose to 12.8%, the highest since September 2020. There’s clearly significant slack within the Kiwi labour market.

Hours worked fell 1% over the quarter, marking the sixth straight quarterly decline. That’s a concern for how June quarter GDP might unfold. High frequency economic indicators have already been flagging a marked slowdown, potentially a contraction, in activity. This statistic adds to the list.

Declining hours is being met with easing wage pressures. More and more workers are receiving smaller and smaller pay rises. For example, the number of workers receiving a pay rise above 2% but below 3% has been steadily increasing for the last two years. And the wage bill (private sector Labour Cost Index) rose 2.3% over the year – the lowest in four years. That’s quite the drop from the 4.5% peak. That’s indicative of a weak economy.

Overall, the labour market is weaker than the RBNZ had expected back in May. The unemployment rate may have been in line with their forecast, but only because of the drop in the participation rate. Labour demand is clearly weaker than the 0.2% gain the RBNZ had forecast in May. Alongside contained and anchored inflation expectations (see Chart of the Week), the door remains open for a 25bps rate cut later this month. And the cash rate will need to go to 2.5%, eventually.

Financial Markets

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

In rates, the short end sits immune to offshore developments

“Lately, short end interest rates in Kiwi have been immune to developments offshore. The shock payroll report from out of the US was a different story. Rates here fell sharply lower early in the week and remained there, ending the week 10bps lower across the curve with 2-year now sitting around 3.06%. In the short end, there are now 50bps of cuts priced and a terminal of around 2.75%. A rate cut in August is almost fully priced, but a follow up in October is still seen as unlikely.

Ahead of NZ labour data, US payrolls fresh in the mind, the market was nervous about a potential weak result. In the end, the numbers matched the RBNZ’s forecast and were ultimately taken as not weak enough to alter the timing or amount of further OCR cuts. Similarly, inflation expectations coming in a fraction lower did nothing to trouble the scorers.

With all the major data now released, the next steer with be from the RBNZ itself next week with a full suite of updated forecasts and OCR track.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, it’s a waiting game for the Kiwi dollar

“The Kiwi dollar tracked moderately higher following a solid slump lower in the US dollar to start the week, as markets took on board the US non-farm payrolls print. It spooked markets into thinking we should be seeing Fed action that would deliver lower rates in the US. In the lead up to the NZ Q2 labour market print, Kiwi dollar upside was capped at 0.5900, despite the weakened Greenback, as there were concerns that the print could surprise to the downside. In the end the print was pretty much at expectations, but indicated a still loosening labour market. The print just provided confirmation that we will need to wait and see what the RBNZ tell us later this month. A 25bp cut is firmly priced in, but market participants are wary about making bets that we will see the terminal OCR at 2.50%, despite it becoming clearer that this is what is needed to provide some expansion in the economy. Current settings are too neutral. After a lift to 0.5930 after the Labour market data, the Kiwi ended up being capped on the upside, failing to make a sustained break above the 0.5955/0.5960 level over the week, finishing the NY close at 0.5955.

The NZDAUD cross traded sideways last week between 0.9110-0.9150. Tomorrow the RBA have a rate decision, and a 25bp cut is firmly priced in. There are some concerns that they will surprise again with a hold, and this would see NZDAUD back at 0.9000/0.9050, but it’s an unlikely scenario. Further direction for this cross will come from the RBNZ’s rate track next week. The other major data point this week for financial markets is the US CPI print. The headline print is expected to come in at 2.8% y/y, but any signs of tariff pressure on prices in the data could see a move higher again for the US dollar, and the Kiwi lower, potentially down to 0.5850.” Mieneke Perniskie – Trader, Financial Markets.

Weekly Calendar

• Here at home, a range of activity and price indicator data is due out this week. Card spend data was strong in June with sales, largely due to a lift in grocery spend (a price effect) while discretionary spending was restrained. We will likely see the same themes in the July update this week. The monthly selected price indicators are also released this week, and may show another solid rise in food prices due to continued strength for commodities. Household energy prices will also be of keen interest, as well as rents which have been subdued. We may also receive an housing update from REINZ this week. After seven straight months of (modest) gains, house prices dipped in May. Lower interest rates are spurring buyer interest, but the market is still flooded by listings.
• The RBA is expected to deliver a 25bps cut this week. Inflation has come in line with their forecasts, but the weakness in the labour market suggests there is more slack in the economy than the RBNZ was expecting which suggests a softer inflation outlook. Just recall that the RBA wrongfooted the market at the last decision. There's a hesitation to ease policy. If they do cut, then expect a tone that emphasises caution and preference for a gradual easing approach.
• Aussie jobs data will likely show stronger job growth in July, with market consensus backing a 23k increase in employment following the 2k gain in June. The unemployment rate is picked to fall slightly, from 4.3% to 4.2%.
• For financial markets, July US CPI is the focus. Inflation likely accelerated from 2.7%yoy to 2.8%yoy due to a moderation in the disinflationary impulse from components such as used cars and hotels. Consumer sentiment has recently improved with greater willingness among consumers to spend on discretionary goods and services. Core inflation is also expected to rise to 3% from 2.9%. The focus however will be core goods inflation, for any evidence of the long-awaited tariff pass-through.
• Across the pond, UK GDP figures are likely to show a sharp slowdown in the second quarter. The economy expanded a strong 0.7% at the beginning of the year as firms ramped up production in anticipation of a spike in spending before tariffs hit. That strength has been unwinding, with preliminary data for April and May showing a decline in output in both months. Economic activity likely grew by just 0.1% over the second quarter. Beyond Q2, growth is expected to remain slow due to several factors including a slowdown in global demand. UK jobs data will also likely show the labour market and wage growth continuing to cool.

See our Weekly Calendar for more