Economic Update
Stay Informed on Market Trends

Financial markets in November were immediately defined by two major contrasting events: a crucial step toward de-escalation in the US-China trade war, and the debilitating, record-long US Federal Government shutdown.

​

Initial optimism was sparked by the tactical, one-year agreement between the US and China to pause new tariffs and counter-tariffs, providing a positive footing for market entry into the month. However, this sentiment was quickly eclipsed by domestic political turmoil in the US. The 43-day government shutdown dominated headlines, culminating in the Congressional Budget Office assessment that despite a projected recovery of the immediate negative impact in the following quarter, the process would leave an estimated permanent economic loss of about USD11.0bn for the US economy.

​

Despite the disruption, interest in the US markets was maintained by a couple of key data releases. The ‘stripped-down’ CPI inflation print showed the annual rate rising from 2.9% to 3.0% in September, its highest level since January. Following the Government's eventual reopening, the September employment report provided a mixed picture: 119k workers were added to the labour force, significantly exceeding forecasts at 50k, yet this gain was offset by a sharp downward revision to the August numbers from a 22k gain to a 4k decline. Ultimately, the jobless rate inched up to 4.4%, the highest since October 2021, while average annual wages firmed to 3.8%.

​

The Reserve Bank of New Zealand (“RBNZ”) voted 5 to 1 to reduce the Official Cash Rate (OCR) by 25bps to 2.25%. The decision emphasized the significant excess capacity in the economy, with confidence that medium-term inflation will return to the target mid-point. The cut is intended to support the early stage of the economic recovery, underpin consumer and business confidence, and lean against the risk of a too-slow recovery. Future OCR moves will depend on how the outlook for medium-term inflation and the economy evolves.

​

The statement highlighted the risks to the inflation outlook are considered balanced. There are upside risks in that a faster-than-anticipated recovery in household spending and house prices due to lower mortgage rates, a quicker restoration of business profit margins due to improving demand and stronger on-farm investment, while the downside risks remain from overly cautious households/businesses slowing the domestic recovery, a correction in global equity markets should AI returns disappoint, and the downside risks to growth in China.

​

Coincidentally, the local data releases after the RBNZ meeting also reflected a more optimistic outlook after Q3 retail sales spiked 1.9% from Q2’s 0.5% increase, business confidence surged to its highest level in 11-years jumping from 58.1% to 67.1%, although the unemployment rate squeezed from 5.2% to 5.3% and inflation firmed to 3.0% in the month.

​

New Zealand Interest Rates: 

​

While the RBNZ’s 25bp rate cut was expected, the central bank made it clear it was moving to a watch and wait mode, with future OCR moves dependent on data releases. The RBNZ’s updated OCR projections implied a small chance of one more cut but with no change likely until mid-2027.

​

The RBNZ’s OCR track implies a reduced chance of an additional rate cut than what the markets had been implying prior to the announcement, with the RBNZ’s base at 2.20% against the markets 2.10%, which saw swap rates move higher. From their mid-October lows, swap rates are 45bps-50bps higher amid a flattening bias - with the 2-year vs.10-year spread compressing from 117bps to 108bps. It should also be noted the current market pricing implies a rate hike by 2026-year end, while the RBNZ’s OCR projections are not forecasting a hike until Q2 2027.

NZD/USD:

​

Barring a global shock or significant deterioration in the NZ economy, the RBNZ’s next move in interest rates is most likely up. The balanced statement, and the fact that one of the MPC members voted to hold the OCR at 2.50%, saw the NZD/USD lift in the immediate aftermath of the announcement, rallying from 0.5625 into the high 0.5700’s, with the rally mirrored on the crosses.