Calls for rate cuts
Kiwibank has highlighted the growing calls for rate cuts, driven by a collapse in business confidence.
European politics took the spotlight last week, but locally, the NZIER’s business survey added to the list of weak economic data. This week's focus is on the Reserve Bank (RBNZ).
European political shifts
European politics saw significant changes. The UK witnessed the end of a 14-year Conservative reign, with Sir Keir Starmer’s Labour Party winning a landslide victory.
In France, a left-wing coalition, despite falling short of an absolute majority, now leads after a surprising upset against the National Rally. This shift promises major changes to public spending, minimum wage, and retirement age.
US labour market and economic data
The US labour market showed mixed signals. June’s nonfarm payrolls reported 206,000 new jobs, though previous months were revised down by over 100,000 jobs.
The unemployment rate rose slightly to 4.1%, and average hourly earnings increased by 0.3% in June, marking the lowest annual wage increase in three years at 3.9%. This data aligns with what the Fed aims to see ahead of their inflation report due Friday.
RBNZ’s upcoming policy meeting
RBNZ’s next policy meeting is set for Wednesday.
In May, RBNZ kept the cash rate at 5.5% for the seventh consecutive meeting, maintaining a hawkish stance. However, Kiwibank analysts argued that more hikes are unnecessary.
“We didn’t see the need for the RBNZ to exert more pain onto households and businesses. The RBNZ simply needed more time,” said Kiwibank economists Jarrod Kerr, Mary Jo Vergara, Sabrina Delgado (pictured above, from left to right).
Economic weakness and inflation
Despite hurdles, such as achieving the RBNZ’s 1-3% inflation target, Kiwibank believes aggressive tightening has already taken effect.
“Aggressive tightening from the RBNZ has worked. And setting policy today is about influencing the economy over the next 18 months,” the Kiwibank economists said.
Rate cuts are seen as necessary, with the first cut potentially in November, they said.
Market reactions and forecasts
Financial markets reflect these sentiments, with NZ yields continuing to grind lower.
“NZ yields continue to grind lower as QSBO data added to the growing list of weak NZ data outturns,” said Ross Weston, head of balance sheet – Treasury.
RBNZ’s OCR decision on Wednesday is seen as a non-event by market participants, with significant changes expected later in the year as more data becomes available.
Currency and market dynamics
In currencies, the Kiwi dollar experienced fluctuations, opening last week at 0.6076 and ending near 0.6170.
“The NZIER quarterly business opinion survey made for sombre reading early in the week, and the Kiwi initially slid a little lower,” said Mieneke Perniskie, trader - financial markets.
However, global political events and upcoming US CPI data could further influence the Kiwi dollar.
Key data and events
This week, RBNZ’s July Monetary Policy Review is the key event, with no policy changes expected.
The US June inflation report is also anticipated, likely showing a slight rise in headline CPI.
Other significant data includes the UK GDP print for May, China’s price data, and Japan’s labour earnings growth.
Read the Kiwibank report, Calls for cuts were crystalised by a collapse in confidence.
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