Last week was jam-packed with data releases and central bank rate decisions. And the most important of all was the big, bold 50bps cut from the US Federal Reserve – shifting the federal funds rate to a range of 4.75% and 5%. Take it as a sign that the Fed is serious about removing the chokehold on the US economy. But it’s hats off to the Fed for delivering an outsized move without causing mass hysteria in the markets. In fact, risk appetite improved in the days following the announcement. Equities rallied and the VIX – a measure of volatility in financial markets – actually declined. Not exactly the outcome we were bracing ourselves for going into last week’s events. As reflected by a lift in the US 10-year Treasury yield, investors are feeling confident about the growth outlook. The Fed’s updated projections still paint a rosy outlook, with unemployment peaking just 0.2%pts above the current rate of 4.2% and the economy growing above trend through to 2027.

The new dot plot signals another 50bps of easing this year, with two meetings remaining, and 100bps of easing in 2025. Odds of a soft landing have increased now that the Fed is chartering a course back to neutral policy settings. Where the neutral rate lies, however, is still anyone’s (educated) guess. Fed officials can’t quite agree. The median projection of the long-run neutral rate rose to 2.9%, but the spread of forecasts ranged from 2.4% to 3.8%. We would argue it is around 2.5-to-3%. And that’s still a big drop from the 5.5%, very restrictive, peak. Relief is coming.

For the RBNZ, we’re expecting another 50bps of cuts by year-end, like the Fed. But we think the RBNZ will need to do more than the Fed next year, as the Kiwi economy requires more rate relief. Economic output has contracted in five of the last seven quarters. And it was the 0.2% decline over the June quarter that was the latest to add to the tally. The fall of -0.2% was not as deep as the -0.4% that majority of forecasters were expecting. But it’s still a fall. RBNZ had forecast a fall of -0.5%. But this was revised down from a +0.2% gain in their estimates in May. On a per capita basis, the report is miserable. We’ve seen seven consecutive contractions, with a sizable -0.5% in the June quarter. Activity per head is down 2.7% over the year, and down 4.6% from September 2022 – far worse than the cumulative 4.2% decline during the GFC. There is light at the end of the tunnel, and it’s burning brighter. We think the RBNZ’s decision to cut the cash rate in August, marks the turning point in this cycle.

Our latest economic report card proves that restrictive monetary policy has done enough damage to restrain inflationary pressures. Enough is enough. And the RBNZ are responding – late, but in earnest. A rate cut in October is as close to a done deal as you get. In fact, we’d argue the only discussion should be on delivering 25 or 50. We’d advocate 50. And again, 50 in November. The RBNZ’s first 25bp cut in August marked the start of a move towards 2.5-to-3%. That’s at least 250-to-300bps. We argue the RBNZ needs to get the cash rate below 4%, asap. It takes up to 18 months for rate cuts to filter through the economy. We all love fixed rates. And fixed rates need time to roll off. Effectively, the RBNZ are cutting today for an economy at the end of 2025, the start of 2026. Get moving…

Financial markets

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

In rates, markets call for the RBNZ to get the job done quickly:

“Kiwi yields plumbed new lows early last week under weaker offshore data and the FED delivering a -50bp cut. The FED tempered the larger than expected cut by admitting being behind the curve, but also attempting to water down expectations about the size of future cuts. The US market prices in -74bp of cuts into the next two meetings until year end. The larger than expected cut saw NZ yields lift off the lows and the curve continue to steepen as the more aligned central banks (FED, RBNZ) head down the front loading path. The FED also increased the long term FED Funds rate forecast again from 2.75% to 2.87% (from 2.50% earlier in the year) adding a little more impetus to steeper curves. Kiwi GDP was slightly less bad seeing some of the chance of a -50bp cut in October reduce, albeit only back to -39bp temporarily from -41bp, the bulk of the front loading remaining with -128bp of cuts priced in over the next 3 meetings. A mix of poor liquidity, market bias, FED pricing, and the dovish August RBNZ pivot/cut all playing a part.

Data reads will drive direction once again. The RBNZ calling out QSBO data next week as a key piece of data ahead of the 9 October RBNZ meeting. While 3Q CPI out a week later on 16 October will likely shape the November meeting pricing. The US Election on November 5th another event risk lingering in the background, and more so than ever a potential deflation risk for NZ if the Republican tariffs are applied. Mortgage fixing remains on the shorter side across the industry, much hinging on how much easing is delivered and how early, coupled with a distinct lack of market commentary on the subject. The shortness seeing a lack of mortgage pay side in the market allowing any receive side flow to have a bigger effect than normal. Worth noting the jumbo domestic bank 5 year senior deal last week in regard to receive side flow.

There are calls now for -50bp RBNZ cut(s) to get the job done quickly, which certainly fits the RBNZ ‘s past operating model of getting the job done quickly. November looks more likely given it’s effectively a double meeting until they meet again in February. As observed in the US market delivering a -50bp cut when there was -41bp priced generated little reaction, Kiwi has -41bp priced…the ball is in the RBNZ’s court.” Ross Weston, Head of Balance Sheet – Treasury.

In currencies, the Kiwi remains rangebound with support from a softer Greenback:

“A larger than (initially) anticipated cut from the Federal Reserve last week saw the US dollar remain on the back foot. This combined with our Q2 GDP data coming in soft, but not as bad as expected, meant the Kiwi dollar had some support. We have also seen a recovery of late in commodity prices, which tends to support the antipodean currencies. Ultimately we still think the Kiwi should head lower but it’s a matter of when. And there are headwinds to this move lower, based on market pricing for both the RBNZ and the Fed, and what the timing of cuts ends up being. The Kiwi opened last week at 0.6166, and then traded to 0.6200 before heading back to 0.6188. Following the Fed’s 50bp rate cut, the Kiwi had a brief foray to 0.6266 before trading back down to 0.6185. A bout of risk on sentiment coupled with the Q2 GDP print saw another run higher to 0.6268 and we closed the week at 0.6250. So ultimately not very big moves in the currency, and we remain range bound for now. NZDAUD generally traded lower across the week, as the GDP print combined with Aussie’s resilient labour market data saw the Aussie get the upper hand. NZDAUD closed the week at 0.9150. The RBA tomorrow is not likely to make any major waves. We expect the RBA will hold rates unchanged at 4.35%, and only a major change in the accompanying statement is likely to give the NZDAUD cross a big nudge lower.” Mieneke Perniskie, Trader - Financial Markets.

The week ahead

• It's a quiet week for domestic data. The focus is on offshore developments.
• Across the Tasman, it's the RBA's turn to take the mic. But unlike many of its peers, the RBA is yet to begin its cutting cycle. They were late to hike rates, and will be among the last to start cutting. At this week's meeting, the RBA is expected to hold the cash rate target at 4.35%. The case for further tightening is diminishing as economic growth weakens. However, the RBA will likely maintain a hawkish tilt to keep inflation expectations in check. A softening in tone may come later this year in November, once more policy-critical data will be known, notably jobs data and Q3 inflation. A day after the RBA's policy announcement, monthly inflation is due out. Aussie inflation likely eased to 2.7%yoy in August from 3.5%yoy. Soft fuel prices as well as the Govt's cost-of-living rebates are expected to be the main drivers for the slowdown in the headline rate.
• In the US, PCE deflator data for August is due out. Both consumer and producer price inflation data suggest the core PCE will rise 0.2% over the month, keeping pace with the rise the month prior. Unfavourable base effects however will likely mean an acceleration in the annual rate to 2.7% from 2.6%. After a strong gain of 0.5% in July, personal consumption likely slowed to 0.1%
• Over in Europe, flash PMI surveys for September will offer some insight as to how the economy fared over the third quarter. The headline reading rose to 51.0 in August from 50.2. And the average for the last two months is below that for the June quarter period. These readings are consistent with a deceleration in economic growth for the monetary bloc. The service sector continues to outperform manufacturing likely due to an improvement in real incomes. The 2024 Olympic games held in France has also been a likely support for the service sector over the last few months.
• In between data releases, several central bank officials are scheduled to speak this week. US Fed Chair Jerome Powell's speech on Thursday will be most anticipated as it follows the Fed's 50bp cut at its September meeting.

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