Financial market participants were reminded of the strength of the US economy last week. The September payrolls was shockingly strong. Over 250k jobs were added in the month, far exceeded forecasts of a 150k gain. The tally for the last two months was also revised higher by a combined 72k. The unemployment rate fell for the second straight month to 4.1%. And wage growth came above forecast at 4%yoy from 3.9%yoy. Taken alongside expectations of inflation lifting just 0.1% in September (data out this week), the US is truly shaping up to be a Goldilocks economy. Inflation is relatively benign and the labour market is robust. Markets and local commentators are re-thinking bets on the size of the Fed’s November rate cut. The data suggests removing another 50bp cut from the table and potentially replacing it with a pause. Indeed, traders are now pricing in less than a 25bp cut for the November meeting, a sharp pullback from the 33bps of cuts prior to the payrolls print. US treasury yields jumped in response, and the US Greenback (measured by the DXY) notched its largest weekly gain (~1.6%) in two years.

While a 50bp cut may be less likely in the US, the RBNZ will most likely deliver such a move on Wednesday (read our full preview). It’s the easiest thing to do. Market traders, and economists, have positioned for the outsized cut and a cash rate of 3% by August next year. The aggressive rate path has pushed all wholesale rates lower. The 2-year swap rate (used by banks to price 2-year fixed mortgage rates) has collapsed from a 4.6-to-5.2% range, to 3.65% at time of writing. If the RBNZ cuts as we suggest, and signal more to come, we’d expect the recent rampant rally in rates to hold. Anything less than 50bps in October and November would cause a massive move, in the wrong direction.

And let’s be clear, cutting in 50bps provides relief, not stimulus.

We are 250bps away from the RBNZ’s estimate of long term neutral. Neutral, a Goldilocks rate that’s “just right” and not too hot or cold, is estimated to be around 2.75% (with wide confidence bands). So in order to remove the restrictiveness of current policy settings, the RBNZ should accelerate their cuts. We’re arguing that the RBNZ should cut to 2.5%, the lighter side of neutral, with a hint of stimulus. And then there are the lags.

The lag between cutting the cash rate and the greatest impact on the economy is around 18 months, historically. That’s early in 2026. We believe the 18 month lag will be shorter in the current cycle. Because most households have shortened up their mortgage fixing. Most mortgages are fixed for less than a year, with the 6 month rate the most popular. That’s good news. But it is still a 6-to-12 month lag. Larger cuts today will give greater relief in 2025.

‘Survive til 25’ will become ‘thrive in 25’.

Given what we know, we would cut, in 50bp chunks. Chunky cuts would cement market pricing and allow banks to pass on the lower rates to customers. Savers have fair warning. The lower mortgage and business lending rates would help support confidence throughout the economy.

We took a quick poll of our followers on X (formerly Twitter), asking them what they think the RBNZ should do this week. and the results reflect the balance of savers versus borrowers. Most people (60%) want rate cuts. And the harder the RBNZ cuts, the better. But a third of respondents were savers and opted for no rate cuts. The poll results remind us that monetary policy is a blunt tool. There are winners and losers with any move the RBNZ delivers.

Financial markets

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

In rates, geopolitical unrest and payrolls pushed yields higher

“Last week, the upcoming October meeting (and to a lesser extent November) loomed large. With only the QSBO to provide much in the way of direction before the meeting the results of the survey were scrutinised closely. Though far from definitive, for bank economists it was enough lock in calls for a 50bp cut and we saw a stampede of call changes follow. However, with so much already priced rates were only a tad lower on the week.

Global rates have been livelier, with conflict in the middle east and higher oil prices combined with robust US economic data saw Treasury yields move higher. To add more fuel to the fire over the weekend non-farm payrolls printed well above expectations seeing pricing of cuts pared back with now 25bps compared with 33bps ahead of the data. This was following comments from Powell’s last week that the Fed would likely proceed with orderly 25bps cuts.

Expect to see reduced expectations for outsized cuts in the US to flow through to NZD rates this morning. But we won’t have to wait long until OCR announcement to see what’s delivered. The inflation print next week will provide more direction for November meeting.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, the Kiwi dollar awaits the RBNZ: 50 or 25?

“Last week the Kiwi seesawed between risk on and risk off sentiment. The push/pull effect was driven by positive sentiment around China stimulus but also concerns around Middle East tensions. We opened the week at 0.6345 before hitting 0.6270 as geopolitical tensions escalated. Then a brief foray to 0.6310. We then almost continually tracked lower to 0.6210, as multiple local banks aligned their views around the OCR, with the majority now expecting a 50bp point cut on Wednesday, ourselves included. The QSBO survey released last week, showed some optimism, but it also highlighted the current state that we are in, and it’s not pretty. We think a 50bp cut is absolutely required at this juncture, and most of this is currently priced in. The bumper US Non-farm payrolls report saw us hit a low of 0.6148 on Friday night before we settled at 0.6160. The US Dollar had a big correction higher, and we may see more of this linger at the start of the week as the view around the US Economy is now sitting firmly in the positive territory as they come closer to achieving a soft landing. On Wednesday we will see whether or not the RBNZ deliver the expected 50bp cut. If they do, we expect that with this currently priced into the Kiwi, the confirmation will drive the Kiwi closer to the 0.6000 level, which is arguably where it should already be sitting from a medium term view. A 25 bp cut however, will likely see a solid run higher, back towards the 0.6300/0.6350+ point. There is of course the possibility that they keep the OCR at the current level, but at this stage we consider this to be the unthinkable, so we are not even going to write about that scenario. NZDAUD is now trading towards the lower end of its recent (painted on) range at 0.9070, but it is going to need to see another cut to the OCR before heading towards 0.8900 territory. The divergence between the RBNZ and RBA should continue to play out in the meantime to see the cross lower.” Mieneke Perniskie, Trader - Financial Markets.

The week ahead

• The RBNZ's October policy announcement dominates the domestic calendar this week. Market consensus is for a 50bp cut to a 4.75% cash rate. The expected acceleration in the pace of easing follows several datapoints signalling a faster emergence of spare capacity in the labour market as well as a swifter pullback in inflation pressures. To stave off further weakness in the NZ economy, a faster return to neutral policy settings is needed. On Friday, the monthly selected price indexes - including the food and rental price indexes - will be released which should show inflation pressures continue to moderate.
• In the US, the September inflation print is the headline event for financial markets. Market consensus expects consumer prices rose 0.1% over the month, with the annual rate falling to 2.3% from 2.5%. Lower energy costs, led by falling gas prices, were the likely downward drivers. Primary rents are expected to have increased, but at a slower pace. Core inflation is expected to keep pace with the 0.3% lift in August, enough to see the annual rate edge down to 3.2% from 3.3%. Ahead of the CPI release, the minutes of the Federal Reserve's September policy meeting will be released.
• The minutes of the ECB's September meeting - when a 25bp rate cut was delivered - will also be released this week. Market participants will comb through the minutes for any indications on the future rate cut path. At the post-meeting press conference, President Lagarde emphasised the central bank's dependence on data. Inflation has since fallen below the target 2%, with underlying inflation pressures also continuing to ease.
• UK monthly GDP is due out and will likely show an acceleration in economic growth. Output flatlined in July, but market consensus expects a lift of 0.2% in August. It follows a sharp rebound in retail sales, PMI and other high frequency indicators. The monthly print will likely point to a continued recovery in activity from a long period of broad stagnation under both high interest rates and high inflation.

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