Much More Mayhem In Markets, Maybe. Event Risks All Over The Show

• There’s plenty of event risk this week. Three central bank announcements (RBA, US Fed, BoE), two domestic economic events (RBNZ FSR, Q3 jobs report), and one US presidential election
• Stats NZ’s suite of labour market data is out on Wednesday. The Kiwi labour market likely loosened further over the September quarter. We expect the unemployment rate lifted to 5% from 4.6% - the highest since the end of 2020.
• Yields curves have steepened, but not all because of Trump. As our COTW explains, the primary driver has been around the US Fed, cutting less, and the US economy outperforming.

Here’s our take on current events

The US rodeo continues! After an already big week of data releases last week, the main acts – the US election and the Fed’s rate decision - will take the stage this week. With just two days to go until the election, current polls still show the presidential race to be neck-and-neck. In the final stretch it’s going to come down to the swing states.

We get asked a lot, “What will it mean if Trump gets in?”, to which our favourite answer is “We don’t really know.” Broadly speaking we can make assumptions on what he represents. As a republican, we can expect a pro-growth and inflationary environment which saw equities and rates take off back in 2016. But given what markets know about Trump now, we’re not sure we’ll see the same reaction.

What we do know is there’s going to be volatility in the near term as markets adjust to the electoral outcome. But for us, what’s most important for the US economy is the Fed. In the medium term, what the Fed does is going to be the main driver for rates, equities and the US dollar. And conveniently we won’t have to wait long to hear from the Fed post-election. Meeting a day later than usual, (thanks to the election) the Fed is expected to deliver a 25bps cut, a more “incremental” step from the 50bp cut in September. Despite kicking off their cutting cycle with a bang, strong economic data and several Fed officials support a more gradual pace of easing.

Here at home, we’re getting ready for another key data release ahead of the RBNZ’s November meeting. On Wednesday, Stats NZ will provide an update on how the Kiwi jobs market fared over the September quarter. And we expect a continued loosening in labour market conditions. (See our full preview here). By our calculations, the unemployment rate likely lifted to 5% from 4.6%. That would mark the highest rate since the end of 2020.

Previously, the rise in unemployment had been a consequence of a migration-led expansion of the labour force. Employment growth remained strong, albeit not strong enough to keep pace with growth in labour supply. But as expected, there has been a shift in the narrative. Stats NZ’s monthly employment indicators are showing either declines or flat growth in the number of jobs. Over the September quarter, monthly filled jobs (seasonally adjusted) averaged a 0.7% decline. Employment is quickly losing its shine and will drive further slack in the labour market from here.

Everything washes out in wage growth. And wage growth is cooling. The private sector Labour Cost Index (LCI) hit a series high of 4.5% in early 2023, as rising inflation expectations and labour shortages bolstered wage demands. But medium- and long-term inflation expectations, are now well-anchored at 2%. We expect to see a 0.7% quarterly rise in wages, pulling down the annual rate to 3.5% from 3.6%.

The jobs data is the final key national statistic before the November MPS. Our forecasts are largely in line with the RBNZ’s latest projections. 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. Market traders are more eager for the RBNZ to pick up the pace. Current market pricing shows that embers of a 75bp cut are still glowing red. However, we think we would need to see a far softer jobs report to justify such a supersized slash to the cash rate.

Charts of the Week: Steeper, in a good way.

The US election, with thoughts of Trump being re-elected, has caused a push higher in US interest rates. Trump’s policies are seen as stimulatory and inflationary. Even Harris’s policies are likely to cause a bit of inflation. The rise in US yields has pushed interest rates up globally, including in NZ. And it’s the longer end rates, like 5- and 10-year, that have moved the most. The move has not impacted our shorter rates, with the 2-year swap rate firm around 3.68%. The 2s basically haven’t moved much at all.

If you’re on a trading floor, you like looking at curves. As analysts, we love ‘em. If you could imagine a sand pit full of kids with tonka trucks, sandcastle buckets, and spades… the cool kids are the rates traders, the naughty kids are the FX traders, and the economists are sitting on the grass outside the sandpit, not invited to play. We just model what it would be like to play. And the stock market traders are the smallest, covered in sand, but always optimistic. All kids understand the importance of interest rates. Interest rates are like the sand.

We’ve seen some extraordinary moves in interest rates over the Covid period. Interest rates broke to new lows, in the history of mankind, and even became negative in parts. Those same rates were catapulted higher over 2022 and 2023 as central rates had to unwind and reverse policy stimulus. And now they’re cutting again. Interest rate curves, typically measured by 2-year rates versus 10-year rates, move in response to economic developments and policy changes. When central banks cut rates, shorter term rates move (down) the most, and the curve steepens. Short term rates fall below long term rates. But sometimes it's the longer end that moves more, like what we’re seeing now.

The move in US rates is not all Trump. The primary driver has been around the US Fed, cutting less, and the US economy outperforming. The US 10-year has lifted from a little over 3.6% to 4.38%. Most of that is fundamental, economics driven lift. We’d say the move from 4% to 4.38% is more election driven. Trumps polices are inflationary… and so too are Harris’s.

So what does it mean? Well, rates markets are pricing in a bit more growth and a bit more inflation over the longer term. Some of that move reflects central bank easing. Cutting interest rates generates more growth and inflation. And some of that move reflects the risk of inflationary policies in the US, including tariffs. With higher 5-to-10 year rates, the mortgage curve may find a higher base next year. We still see mortgage rates hitting 5%, or slightly below, but they may not be there for as long as we currently expect.

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