Starting with the main event on the newswires, the US election. Donald Trump heads back to the White House, with a comfortable 312 electoral votes under his belt. In the end, the presidential race was not as neck-and-neck as polls made out to be with Trump snagging all the swing states. The Republican party have also come close to securing a majority win in the Senate and House of Representatives. In effect, the outcome makes it relatively easier for President-elect Trump to legislate the policies campaigned across areas including tax and trade. However, it won’t be until after the inauguration in January that we will learn more detail around the policy agenda.

But enough about the election itself. Let’s talk markets. In reaction to Trump’s win and in anticipation of the pro-growth, inflation-inducing policy, we saw equities take off, yields lift higher, and the Kiwi lose its wings and take a plummet. Kiwi rates from the 2-to-10-year lifted about 20 points higher post-election. While the Kiwi dollar hit a low of 0.5912. Though as the dust has settled, much of that has reversed. The Kiwi managing to later hit a high of 0.6038 and now sitting in the 0.5970s. Rates across the board have also pared back a bit from their post-election surge, opening the week about 15points higher than last week. These are some big moves. But we did say it was going to be a volatile week.

Beyond the election, the decisions by the US Fed is the most important driver for the US economy. And as the Fed made clear in their policy meeting last week, they are on the path of returning rates to neutral. The pace at which they do so however does seem to be slowing. The Fed delivered a 25bp cut, following the 50bps cut in September. Given the strength of US economic data as of late, the Fed is opting for a more gradual pace of easing.

To the same tune the BoE also cut their cash rate by 25bps and stated their need to retain a “gradual approach” to rate cuts. Meanwhile, the RBA, despite the excitement of their famous ‘Melbourne Cup Meeting’, didn’t excite much. Their cash rate was left unchanged along with the RBA’s tone remaining hawkish.

Here at home, last week’s data confirmed the growing weakness in the labour market. The unemployment rate rose to 4.8% from 4.6%, hitting a near 4-year high. We and market consensus however expected an increase to 5%. That’s not to say the labour market is any stronger than expected. Because employment still shrank over the September quarter, down 0.5%. Rather, it is the sharp fall in the participation rate that tempered the rise in the unemployment rate (see COTW). And that in itself is a sign of a weak jobs market.

The latest stats also showed further easing in wage pressure. The private sector labour cost index – a measure of pure wage inflation – slowed to 3.3%yoy, moving further away from the 4.5%yoy peak. A shrinking majority of jobs (63% - the lowest in three years) received a pay rise, among which fewer enjoyed a 5% pay bump (from 32% to 27%). A growing share are seeing no change in pay. Wages, on a quarterly basis, are now running at rates consistent with overall consumer price inflation at 2%. That’s good news for the RBNZ.

Despite a stronger headline number, the data is unlikely to skew the RBNZ’s thinking. Because the key takeaway is the same: the Kiwi labour market is weakening. A further relaxation in monetary policy settings is needed. The labour market has crumbled under the weight of the RBNZ’s heavy-handed interest rate hikes. And it’s only the beginning. We forecast a further increase in the unemployment rate next year. But it's important for the RBNZ to stay ahead of any further labour market slowing by proceeding with rate cuts sooner rather than later. 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.

Financial Markets

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

In rates, Kiwi yields are being dragged higher.

“Kiwi yields higher by around +15bp over the week. Dragged higher by a risk friendly/higher debt US election result, although still some clarity needed on exactly how that will affect NZ trade wise. The RBNZ speaking in parliament calling the US election result a “…higher inflation package”, but very much manageable. NZ OIS now prices a terminal rate low point of around 3.15% out to mid 2026, from around 3.00-3.05% prior week. The FED announced a -25bp cut on Friday, noting that in the near term the election will have no effect on policy. Interestingly the BOE lifted their growth and inflation forecasts, indicating a more measured cutting base. The FED back on a path to neutral, policy is still restrictive, and the path dependant on incoming data. The market interpreted the FED as slightly more dovish vs post-election pricing cementing a partial unwind of the sell-off over the prior 2 days. All in all US data remains resilient the FED’s tone more balanced/neutral and debt levels will be higher = potential for higher yields and steeper yield curves.

Domestically the strong headline but weak underbelly employment release was largely ignored in favour of offshore events. The headline enough to secure a -50bp cut in Nov and a slight rise in yields as the market prices in -53bp of cuts for November from -57bp prior. Now the November argument is largely settled, February is the new battleground which currently sits at -41bp of cuts. Cross market spreads are wide, especially against Aussie, meaning NZ yields are much lower than Aussie seeing some unwinding of the receive Kiwi pay Aussie trade. This cross-market underperformance of Kiwi rates a key feature of the recent global sell off as Kiwi data remains sub optimal.

In summary it feels like a bumpy move higher in mid/long end yields. Kiwi short end should remain anchored but will be subject to mortgage flows and cross market spreads which will drive direction in absence of data.” Ross Weston, Head of Balance Sheet – Treasury.

In currencies, Kiwi waiting for the dust to settle.

“It was a big week for currencies last week, with plenty of volatility inducing events to rock the apple cart. However the Kiwi actually performed rather well. The initial surge higher in the US dollar following the US election outcome last week was relatively short lived, with the Fed’s rate decision on Friday seeing a reversal in the US dollar strength. Traders are also now looking to the future, and the potentially inflationary aspects associated with Trump’s plans for his second presidency. The wave higher for the US dollar saw the Kiwi hit a low last week of 0.5912. But soon after the FOMC decision saw the US Dollar pummelled lower, and the Kiwi managed a high again of 0.6038. Some less positive data out of China on Saturday, saw the Kiwi smacked lower again to close out the week at 0.5965. From here, we need to see the dust settle before the Kiwi finds new direction. Given the rate outlook, for the RBNZ versus the Fed, it is still very clear that the RBNZ need to deliver more rate relief at a faster pace than the Fed does. The interest rate differential will still come into play, so we still see the Kiwi lower from here. We may have some relief rallies higher, but they are likely capped at the 0.6120 level for now. NZDAUD remains range bound, with the RBA remaining on hold with a fence sitting/mildly hawkish stance when it comes to monetary policy settings. NZDAUD opened the week at 0.9040, and traded to a high of 0.9094 on Monday. The RBA decision saw the cross head to 0.9034. The cross then had a brief run higher to 0.9083 before closing out the week at 0.9065: still very much range bound.” Mieneke Perniskie, Trader - Financial Markets.

The Week Ahead

• On the domestic data calendar, the selected price indexes will likely show a further easing in inflation pressures in October. A cooling across the suite of price indicators comprising around 40% of the CPI basket, including food prices, rents, oil prices and airfares, will add to the case for the RBNZ to continue cutting rates at an accelerated pace.
• Across the Tasman, October jobs data is expected to show a slowdown in employment growth. Following a 64k gain in employment in September, just a 15k increase is expected for October. The unemployment rate is also expected to tick up slightly to 4.2% from 4.1% as an increase in labour supply exceeds jobs growth.
• The October US inflation print is the key data print for financial markets this week. Headline CPI is expected to lift 0.2% over the month, with the annual rate rising to 2.6% from 2.4%. Core inflation is expected to print 3,3%yoy for the third straight month as unfavourable base and seasonal effects keeps underlying inflation stubbornly hot. The data will be key for the US Federal Reserve's rate decision in December.
• UK jobs data is due out this week and expected to show still-hot in pay growth. In the three months to September, wages likely grew 4.7%, down slightly from 4.9%. Wage growth is cooling, but slowly which may see the Bank of England proceed cautiously with further rate cuts. The unemployment rate is picked to lift to 4.1% from 4%, but a low response rate to the Labour Force Survey continues to cloud the results. Also out from the UK is September quarter GDP. The data will likely show a slowdown in economic growth, down to 0.2% from 0.5% over the summer. Despite relatively strong pay growth, households have shown restraint in consumption.
• China's October activity data will likely show early signs of recovery in response to strong stimulus announced. Industrial production is expected to expand 5.5%yoy from 5.4%yoy. Growth in retail sales is also expected to accelerate, up 3.8%yoy from 3.2%. The full impact of the stimulus measures however is yet to hit the economy.

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