Falling rates and weak jobs data drive RBNZ easing
New Zealand bond markets are flashing a “big, bold and beautiful bull steepener,” according to Kiwibank economists, as falling global yields and soft local data drive interest rates lower and build expectations for deeper Reserve Bank of New Zealand (RBNZ) cuts.
US payrolls shock, Fed signals shift
“It was all about the US last week,” said Jarrod Kerr, Kiwibank chief economist, alongside Mary Jo Vergara and Sabrina Delgado (pictured, from left to right).
Global drivers – including weaker US labour data and fresh tariff announcements – are rippling through New Zealand markets, adding downward pressure on bond yields.
US payrolls for July rose by just 73,000 versus the 100,000 expected, with nearly 260,000 jobs stripped from prior months through downward revisions.
“The US labour market is not yet in a crisis, with the unemployment rate at 4.2%. But those cracks are widening, and hiring momentum has clearly stalled,” the Kiwibank economists said.
The Federal Reserve voted 9-2 to hold rates steady, but market pricing now points to a September cut.
“The post-Fed moves in the US dollar and bond yields were reversed following payrolls, and the market has returned to pricing in 22bps of cuts in September,” the team said.
Tariffs and trade add pressure
The White House confirmed new tariffs effective Aug. 7: 10% on US trade-deficit countries, and 15% on surplus countries like New Zealand. Kiwi meat and wine now face a slight disadvantage to Australian exports.
“One consolation is that the tariff rates for emerging Asia were significantly reduced … our trading partner growth may not be as weak as initially forecast,” the Kiwibank economists said, noting that retaliation is likely and that NZ’s exporters benefit from a weaker Kiwi dollar, now hovering around US59c.
Bull steepening in Kiwi rates
“With all that’s happened last week, we’ve seen some action in Kiwi rates. We‘re anticipating a strong bull steepening in the Kiwi rates curve,” Kerr, Vergara, and Delgado said.
Kiwibank sees the official cash rate falling to 2.5% rather than 3%, dragging short-term rates lower.
“The market is slowly coming around to this view,” the team said, noting weaker offshore inflation data and mounting global rate-cut momentum.
Domestic conditions support the move. “Growing slack within the labour market should also see wage growth continue to moderate. The balance of power has shifted back to the employers,” the Kiwibank economists said.
Local data and inflation expectations in focus
The June-quarter jobs report this week is expected to show a 0.2% employment decline and unemployment rising to 5.3%, the highest since 2016. On Thursday, the RBNZ’s inflation expectations survey will follow.
“Headline inflation in the high 2s would be an easier pill for the RBNZ to swallow if the longer-term inflation expectations remain close to 2%,” the economists said.
Market aligns for August cut
For mortgage advisers, the trend points to lower short-term rates and potential easing in fixed mortgage pricing, though global volatility remains a factor.
Read the Kiwibank insights in full here.
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