Last week provided an update on the health of both the US and Kiwi jobs markets. And the difference between the two couldn’t be more obvious. The US economy saw jobs growth (143k jobs added in January), a fall in the unemployment rate (from 4.1% to 4%), and an acceleration in wage growth (from 3.9%yoy to 4.1%yoy). Here at home, we saw the opposite… employment contracted (see COTW), the unemployment rate continued to climb, and wage growth trended lower. By many measures, the US labour market remains robust. And with inflation pressures still lingering in the US, the data supports the Fed’s caution toward further easing. Meanwhile, Kiwi inflation is well contained, and Kiwi labour market conditions are weak. Domestic data demands more easing from the RBNZ.

The Kiwi labour market report for the December quarter was ugly (see our full review). The unemployment rate rose from 4.8% to 5.1% - the highest in four years. The labour force participation rate also continued to normalise from record high levels, falling to 71%. Workers are stepping away from the market as hiring appetite has slowed. The underutilisation rate – a better measure of slack in the market – lifted from an already high 11.6% to 12.1%. And the ongoing rise suggests that spare capacity within the broader market is still growing. Measures beneath the umbrella term also moved higher with the underemployment rate – those working part-time and wanting more hours – rising from 4.0% to 4.8%.

The total number of hours worked have been in decline since March last year. With hours worked falling for four straight quarters, the annual print is far from pretty. Outside of the 2020/21 covid period, the number of hours worked recorded the deepest annual decline since 2009. In 2024, total hours worked fell 2.5%, reminiscent of the 3.3% slide in 2009. The cut back in hours and staff was an inevitable outcome for the labour market given the RBNZ’s delivery of aggressive rate hikes. And fewer hours is another warning sign of weak economic activity.

We’re seeing more moderation in wage inflation. The private labour cost index (LCI) – a measure of pure wage inflation – was steady at 0.6% over the quarter. Annually, the wage bill edged down to 2.9% from 3.4%. And the distribution of wage growth showed a lift in the proportion receiving no change in take-home pay, from 37% to 40%. Among the 60% of jobs that received a pay rise, the majority are facing pay increases between 3% and 5%. It’s yet another clear sign of softening employment demand.

We are hopeful that a recovery in the second half of this year should help businesses avoid further significant cuts to headcount. But should we not get the required rate relief from the RBNZ, the risk of further job losses only grows. It’s why we think the RBNZ will need to deliver more than they have signalled this year. When we last heard from the RBNZ, in November, they signalled another two cuts to 3.5% this year, and a very slow move to 3% deep into 2026/2027. Why wait? Why muck around? That leaves conditions too tight for too long. We argue we need to get to 3% (neutral) this year. Especially with inflation already stabilising at 2%. Holding out for longer is just going to cause unnecessary and indeed avoidable damage to the labour market.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, Kiwi yields dance to their own tune

“Kiwi yields mostly danced to their own tune last week with only a few cursory nods to developments offshore. With a lack of fundamental catalysts, swap rates have lately become very flow driven. Recently there has been notable interest to receive NZD from offshore model accounts which has been pushing rates lower. On Monday this saw the downward momentum of the previous week continuing unabated with the 2-year swap rate close 8bp lower.

Though it was not all technical, with positioning, likely in anticipation of a weak employment print, seeing the 2-year testing cycle lows at around 3.33%. In the end however, Wednesday employment was a non-event coming in bang on the RBNZ projection. This disappointment (or relief), alongside the weekly NZGB tender, saw rates bounce off their lows.

Of most significance for rates locally was on the home loan front. Westpac came out with a very attractive 3 year special. Sporting a four handle, the rate got a fair amount of media coverage and put the spotlight back on the volume of fixed loans up for repricing over the next 6 months. Not surprisingly rates opened higher the next day and kept going all day seeing 2-year rates bounce higher, all the way back to where they ended the previous week. This move higher was concentrated in the short end. As a result, the curve flattened a fair bit as receiving in the

longer end of the curve outweighed the move higher in the front end.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, Trump and tariffs likely continue to rattle the Kiwi dollar

“Last week the Kiwi again managed to find a foothold around the 0.5650 level and trade close to this, but it was a shaky start to the week at first. Trump’s initial ‘go’ action on tariffs for Mexico and Canada saw the Kiwi move quickly from 0.5588 down to a low of 0.5526, and then just as quickly, following the announcement that the tariffs would be put on hold for a month (obviously to enable a more thought out or negotiated approach), the Kiwi traded back to 0.5650, carrying on to a high of 0.5696 mid-week. Last week’s NZ labour market report did little in the way of providing direction, as the data came in pretty much bang on expectations. This week we have the RBNZ’s 2 year ahead survey of inflation expectations, but really we are waiting for next Wednesday, when we have the RBNZ’s MPS, and they are still widely expected to deliver a 50bp cut to the OCR. The accompanying statement and outlook should provide us with a bit more colour. In the meantime, currencies are still at the whim of the White House and we will likely see plenty of spikes in volatility in the next few weeks. We still see the Kiwi otherwise in a holding pattern in the 0.5500-0.5750 range for now, and same with our other major crosses, NZDAUD is likely to be very range bound in the 0.9000-0.9100 levels. Next week in addition to the RBNZ, we will also have a rate decision from the RBA. The RBA decision is a little less clear cut in our opinion. While the market has a 25bp cut priced in for next week, the Australian economy is ticking along rather nicely given their restrictive rates, and the RBA have been fairly cautious in their outlooks on inflation in the last year. There is a real possibility that they will keep rates on hold and kick the can down the road until March/April. Otherwise on the data front this week, we have the latest US CPI print.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Here at home, the RBNZ's survey of inflation expectations is due out this week, an important release ahead of the MPS. Consistent with several business surveys, medium-to-long-term inflation expectations likely declined, with the 2year ahead measure potentially falling from 2.12% in Q4. Near-term measures however may post a slight increase in line with the recent rise in fuel prices. The survey is the final key dataprint ahead of the RBNZ's rate decision this month. The survey shiuld show inflation expectations relatively well contained within the RBNZ's 1-3% target band, thus strengthening the case for further rate cuts this year. Also, out this week is the suite of selected price indexes for the month of January, all of which likely showed inflation pressures remain subdued.
• The latest US CPI print is the main data release this week. Both headline and core inflation likely rose 0.3% in January, with encouraging falls in used-car prices and continued disinflation in shelter prices. The headline annual rate likely held steady at 2.9%, while core likley eased slightly to 3.1% from 3.2%. Potentially complicating things will be the new seasonal-adjustment factors and annual revisions. The US Bureau of Labour Statistics will re-estimate seasonal factors for 2020-24, which could change the contour of past inflation.
• UK economic activity likely contracted 0.1% over the December quarter, following flat growth. The fall in activity however should prove temporary, with a lift in government consumption supporting activity this year.

See our Weekly Calendar for more data releases and economic events this week.