So how does a softer than expected inflation print in America affect mortgage rates in New Zealand. Well, wholesale interest rates tend to move together, around the world, especially out the long end of the curve (+5 years).

Looking over at the US economy, it really looks like everything is awesome. Their inflation rates are coming down, while real consumer spending is up. Core inflation is heading in the right direction, and the unemployment rate is still relatively low at 4.2%.

The US is experiencing some slight cooling in job creation, but their manufacturing and services sectors are in solid expansionary territory. Equity earnings are also surprising to the upside. Tech sector earnings are beating hyped expectations and elevating the S&P 500 and other indices.

What does this mean for mortgage rates in New Zealand? Strong American economic performance can make financial markets traders price in higher interest rates, with the Fed likely to hike again. And expectations are for higher for longer. Because New Zealand is a small fish in a massive pond, wholesale funding costs are always influenced by international developments. Higher US bond yields have pushed wholesale swap rates in New Zealand. And that can mean higher fixed mortgage rates. See our chart of the week for a deeper dive into wholesale rates.

Across the ditch, the Reserve Bank of Australia hiked interest rates by 25 basis points. No one was surprised. And the rate differentials with New Zealand remain wide… Because the RBA are poised to hike again at their next meeting. The Kiwi (NZD) remains weak against the Aussie. Although the Aussie CPI came in softer than expectations, it will still represent a level high enough to keep the RBA uncomfortable. So a further RBA hike is on the cards.

Here at home, last week gave us lots of data to mull over.

The labour market is stabilising. Filled jobs rose again in September after a solid August. We were pleased to see that growth in jobs was relatively broad-based across all industries. Regional disparities remain stark. Canterbury punched above its weight, while Northland took a hit.

The Government pulled back the curtains on its financials with the Pre-election Economic and Fiscal Update (PREFU). The fiscal position slightly improved, while the economic outlook was a little softer. Unemployment and inflation will stay a little higher for a little longer. The Government still expects its books to return to surplus in 2029, but with a bit more wriggle room at $4 billion versus $2.6 billion forecast in May. The Government also expects to issue fewer bonds, down $15 billion over the next four years. That’s less debt... and it’s a major priority of the National government.

Check out our thoughts on PREFU for more detail.

Manufacturing continues to do well. ANZ’s Business Outlook showed a small decline in overall business confidence. But the manufacturing industry is bucking the trend. Manufacturers are far more confident, and far more upbeat about export intentions, profit expectations and employment intentions. This aligns with the recent PMI data, showing manufacturers are benefitting from strong offshore demand and a weak Kiwi dollar.

Consumers aren’t sharing in manufacturers’ optimism. And that’s a worry. Consumer confidence was largely unchanged in September, remaining at subdued levels. Thankfully, two-year ahead inflation expectations eased off. But so did expectations of house price growth. We’re still waiting for a meaningful recovery in consumer sentiment, which is a critical missing ingredient for stronger domestic demand.

Financial Markets

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

In Markets – Offshore again…

US rates markets continued to largely drive movements in the early part of the week before Australian and to a smaller extent NZ releases wrestled some control ahead of Friday’s key US employment data. The ongoing situation in the Gulf and elevated oil and refined product constraints are also contributing. For the week our implied cash rate path saw priced year-end and 1-year ahead OCR close at around 3.09% and 3.83%, some 5bp and 10bp lower respectively. The IRS curve was seen lower but steeper, with 2-year IRS at 4.02% (-10bp w/w), 5-year at 4.41% (-6bp), and 10-year at 4.77% (-2bp).

US bond markets continued their choppy trade at the start of the week. The prior Friday night gains our time reversed Monday, as rising oil saw early US trade resume the bond market selling that continued into their session, with a higher and steeper curve the result. Data flow did introduce cause for a pause with some mixed releases including consumer confidence posting a sharp fall, the PCE measure of inflation printing lower than expected, and the headline manufacturing ISM. Fed-speak also reintroduced some two-way risk into markets. While generally reiterating the inflation outlook and resilience of the economy, several speakers noted that there was no need for urgency on further raises noting that the Fed may need more time to assess the next move. Some indicated that they had assessed a likely lower number of additional moves than what was currently priced, or noted the current large gap between the assumed Fed path and the shorter end of the term curve. The build of data and comments did see a reasonable sized rally in rates ahead of payrolls led by the short-end. 2027 Fed Funds futures contracts shaved around 15bp of tightening off their curve and dragged shorter Treasuries along as their curve steepened, with 2-year notes down around 10bp and 10-year around 5bp on the day to around 5.24%. The implied year-ahead Fed Funds pricing around +74 to the current effective rate from low +90s previously, and October tightening chances cut to around 25%. This to a degree reset the likely headline print required on US payrolls data to further any rally, with the resultant weaker than expected print in both headline payrolls and the unemployment rate not resulting in a continuation of the prior days rally.

Australian markets also provided additional direction, with the RBA decision and following that, their CPI focus points. With a September hike essentially fully priced alongside additional moves along the curve, the statement was the focus particularly for any signs of moderation of the hawkish rhetoric given the recent softening in dataflow. Their curve had already started to show signs of resisting further selling in a minor de-coupling with that of the US with their cash curve potentially viewed as stretched already with a terminal cash rate priced above 5%. The RBA raised the cash rate by 25-points to 4.60% with the accompanying statement acknowledging some of the slowing signs in the economy, with this perhaps more so than what the market is accustomed to of late. They also noted that the Board would continue to do what it considers is necessary to lower inflation including increasing the cash rate target further if needed. The RBA press conference saw further explanation of their assessment including that a pause was considered and that rates were considered restrictive. They also noted that despite their thinking that the labour market was still a bit tight, there was no wage-price spiral. This was enough to add to a rally that had already shaken off the prior days US market declines, with three-year bond futures rallying around 8bp post decision. Rate market gains were further compounded the following day after a lower than expected CPI where headline month on month and year on year were seen 0.1% below expectation at 0.4% and 4.0%, with the monthly core read at +0.2% also below expectation. RBA November rate hike probability halved after the release, from 12-points priced to 6 as the front of the curve lead the way.

For our market, we started to take a bit more of a lead from Australian moves, particularly given their curve starting to push back on adding to current priced tightening. Data flow did see business and consumer confidence print lower, with both reads not indicating a lift in inflation expectations. These alongside an Australian curve that was reassessing near-term tightening prospects did also result in a paring back across our curve, with October RBNZ pricing moving back closer to around half from three-quarters priced for a 25bp move, while one-year out shaved around 11bp off the peak priced over the week to finish at 3.83%. Looking ahead we would expect that international developments will continue to play on our curve, though there may be signs that the steepness up the front may be starting to provide a bit of an anchor for the shorter terms. For our market the Quarterly Survey of Business Opinion due Tuesday will provide another read on inflationary and business expectation and will see some attention, particularly as dataflow remains a little light ahead of SPI and CPI due 16 and 22 October. As noted last week, the pricing of the October and December meetings likely will be the key development at the front of our curve, particularly given the re-assessment of Australian pricing and the at least non-accelerating inflation expectations in the most recent surveys. Another point for consideration here may also be the composition of the MPC with the recent addition of an RBNZ internal to the committee. Overall, the path of rates is higher, though the RBNZ has shown through its actions a degree of caution around the pace of the cycle, with this caution likely to start to play a little more on market pricing into the decision at the end of the month. All up, you would normally expect the resultant path to land somewhere between the decidedly cautious path as per the last MPS and the market, barring any other market moving development. Such a development, as we know in this current environment, could emerge at any time. Graham Hughes – Trader, Financial Markets.

In FX – the Kiwi extended its losses last week

The New Zealand dollar extended its losing streak this week and is on track for a sixth consecutive weekly decline, its longest run of losses since early 2025. NZD/USD traded between 0.5594 and 0.5641 during the week, remaining near its lowest levels since November after touching 0.5624 on 1 October.

The Kiwi continues to face a challenging backdrop, driven primarily by broad US dollar strength, higher global bond yields and an increasingly unfavourable interest rate differential. Market pricing remains considerably more hawkish than the RBNZ’s own projections. OIS markets are pricing more than four additional rate hikes from current levels, implying a peak OCR near 3.75%-3.80%, compared with the RBNZ's projected path of around 3.00%-3.25% through 2027.

New Zealand rates have also been dragged higher by the broader global sell-off in bonds. However, the move higher in local yields is beginning to look somewhat stretched, with markets increasingly questioning whether current pricing is consistent with the RBNZ's outlook. Should NZ rates retrace some of their recent rise while US yields remain elevated, the NZ-US rate differential could widen further against New Zealand, creating an additional headwind for NZD/USD.

At the same time, US economic resilience continues to underpin the dollar. Markets have not entirely ruled out the possibility of US policy rates moving back towards 5%, supporting Treasury yields and further enhancing the attractiveness of the USD from a yield perspective. This has left the Kiwi increasingly vulnerable as widening NZ-US interest rate differentials continue to favour the greenback.

Broader macro factors have also weighed on sentiment. Oil prices surged above US$107 per barrel as hopes faded for a deal to reopen the Strait of Hormuz, adding pressure to risk-sensitive currencies. Ongoing tensions in the Middle East, uncertainty surrounding New Zealand's November general election, and the prospect of a closely contested US election have all reinforced demand for the safe-haven US dollar.

Domestically, signs of a still-fragile New Zealand economy have further undermined confidence in the currency, with investors remaining cautious about the growth outlook. Nevertheless, the Kiwi did find some relief late in the week after a significantly weaker-than-expected US non-farm payrolls report (29,000 versus 90,000 expected) prompted a pullback in the US dollar and reduced expectations for further Fed tightening.

From a technical perspective, NZD/USD remains firmly bearish after breaking below key support levels established earlier in the year. Attention is now focused on the November 2025 low near 0.5581 as the next major support level. Initial resistance is seen around 0.5750, with stronger resistance at 0.5843.

NZD/AUD has fared slightly better, gaining support after Australia's softer-than-expected CPI release earlier this week. However, the medium-term outlook for the cross remains challenging. Relative monetary policy expectations continue to favour Australia over New Zealand, suggesting interest rate differentials are likely to remain a persistent headwind for NZD/AUD despite the recent bounce from lows. Mieneke Perniskie – Senior Dealer, Financial Markets.

The Week's Key Events

• The big domestic datapoint this week will be the Quarterly Survey of Business Opinion (QSBO) for Q3. This will give us a much needed pulse-check of how businesses are feeling and performing after a rocky few months.
• Australian consumer inflation expectations and consumer confidence data will provide insight into how Aussie consumers are feeling.
• Eurozone PPI and retail sales data alongside US trade balance data will be other international datapoints to watch.