Economic Update
Stay Informed on Market Trends

A month of deteriorating US economic data culminated in the Federal Reserve (“Fed”) delivering an expected 25bps interest rate cut in September, bringing the Fed Funds rate to a new range of 4.00%−4.25%. The Fed's updated 'Dot Plot’ projections signalled a more dovish stance, projecting an additional 50bps of cuts by the end of 2025 and a further 25bps in both 2026 and 2027. New Fed Governor, Stephen Miran, who only joined the board the week of the meeting at the behest of President Trump, was the sole dissenter - voting in favour of a larger 50bps cut. The statement highlighted the members’ concerns stating, “The downside risks to employment have risen,” while it also acknowledged the recent firming in price pressures, noting, “Inflation has moved up and remains somewhat elevated.”

In New Zealand, it’s not so much a recession, for many it feels more like a depression! The dovish stance adopted by the Reserve Bank of New Zealand (“RBNZ”) in August was emphatically validated by the latest GDP data, which revealed an economy in a much weaker position than feared. The sharp 0.9% contraction in June-quarter GDP, far exceeded the widely expected 0.3% drop, underscored the rationale behind the central bank's recent policy shift. The economic weakness was widespread, with falls in 10 out of 16 industries, indicating a systemic downturn rather than a sector-specific issue. This marks the third quarterly contraction in the last five quarters. This worse-than-expected data has effectively ended prospects of a near-term recovery, leading markets to price a more aggressive easing cycle from the RBNZ, with markets now contemplating the potential for the OCR to fall below 2.50% to 2.25%.

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New Zealand Interest Rates: 

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The stark divergence in economic performance is driving a wedge between monetary policy expectations for New Zealand versus the US and Australia. While robust data has caused markets to scale back interest rate cut expectations for the Fed and Reserve Bank of Australia, New Zealand's weak economy has the market pricing in a more aggressive easing cycle in response. Currently, a 25bps rate cut is fully priced for the next RBNZ 8 October meeting, with markets assigning a 32% probability of a larger 50bps move. This policy divergence is reflected in the terminal rate pricing, with New Zealand's projected to reach 2.25% February 2026—well below expectations for the US (3.00%) and Australia (3.30%), respectively.

Adding a layer of complexity is a pending leadership change. The RBNZ has appointed Dr. Anna Breman as its new Governor, effective 1 December. In her previous role at Sweden's central bank, the Riksbank, Dr. Breman championed transparency by publishing individual board member opinions, stating, “This has increased the transparency of the judgments made by different members of the Board on different issues, and this in turn has made it clear for households, firms and market participants to understand both the policies we are pursuing and how they may change.” Her appointment may signal a future shift towards greater openness and accountability by the RBNZ.

In the interim, the focus is squarely on acting Governor Christian Hawkesby, who has two meetings left to steer policy. The key question for the market is whether the RBNZ will make a decisive 50bps cut to address the slowing economy or deliver a more conventional 25bps cut before his departure.

NZD/USD:

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In the September quarter, the NZD was the worst performing currency against the USD across the G10 currencies. The NZD/USD's 5.0% decline contrasts sharply with the JPY's 3.0% fall and the AUD’s 0.5% gain. The significant underperformance stems from two key factors: domestic economic fragility and the resulting interest rate differentials. Resilient US and Australian economies are seeing interest rate cut expectations parred back whereas the precarious state of the domestic economy is seeing further aggressive OCR cuts priced in. From a technical standpoint, after breaking below 0.5800, the NZD/USD fell to 0.5754. The month-end close at 0.5794 was an unconvincing bounce, triggering a recovery back to 0.5825. Looking ahead, key in the coming month is the 0.5845 level. The ongoing US government shutdown also remains a key variable, which could reduce downside pressure on the NZD/USD.