And so it begins. The tit-for-tat trade tariff tussle is in focus. Over the weekend, President Trump signed an order authorising tariffs on its three largest trading partners – Canada, Mexico, and China – and at scales more sweeping than during his first presidency. Beginning from Tuesday, Mexican and Canadian imports will face tariffs of up to 25%, while a 10% tariff has been imposed on Chinese imports. Canadian energy has also been slapped with a 10% tariff. This one is especially problematic. US oil refineries have become increasingly dependent on Canadian crude oil over the years. Canada now makes up 60% of total US oil imports, up from 33% a decade ago. Canada has already retaliated with a 25% tariff on over US$100bn of US goods. Meanwhile, Mexico is strategizing on its countermeasure. And China is complaining to the World Trade Organisation over legality. No doubt this trade dispute will remain in focus in weeks to come.

Here at home, the RBNZ’s Chief Economist, Paul Conway, took the stage last week to share some insights on Kiwi growth and long-run interest rates. And of course, with the Reserve Bank’s February MPS just weeks away, many, including us, were tuned in for any hints on the RBNZ’s latest outlook. Conway did offer some reassuring words, noting "the Monetary Policy Committee (MPC) is confident that persistent domestic inflation pressures will ease, given the spare capacity in the economy over 2025.” And we agree.

Beyond that, Conway's speech focused on the challenges facing New Zealand's outlook, with particular emphasis on our ongoing productivity problem. We felt that deserved a section of its own, so check out our COTW for more.

This week, our focus turns to the Kiwi labour market, data out Wednesday. And we expect a continued loosening in conditions. By our calculations, the unemployment rate likely lifted to 5.1% from 4.8% - the highest rate in four years.

The labour market lags the broader economic cycle. But it’s catching up now. Down went the economy in 2024, up goes the unemployment rate. Following a period of strong employment growth in 2022/23, hiring has slowed. Over 30,000 (net) jobs were lost in 2024. We expect a second straight quarterly decline in employment last quarter.

Labour force participation continues to normalise from record-highs. The participation rate soared to an all-time high of 72.4%. Because a surge in migration supplied much needed work-ready migrants, and a cost-of-living crisis forced many back to work. But workers are now leaving the workforce as demand weakens. Like in the September quarter, a bigger-than-expected slide in the participation rate led to a more muted rise in the unemployment rate. Conversely, should the participation rate remain unchanged, a higher unemployment rate would result.

Everything washes out in wage growth. And wage growth is cooling as demand weakens and inflation expectations have fallen back to at 2%. We expect to see a 0.6% quarterly rise in wages, pulling down the annual rate from 3.3% to 2.9%.

The jobs data is a key statistic before the RBNZ’s February MPS on 19th . Our forecasts are largely in line with the RBNZ’s latest projections.

With the 2% target inflation rate virtually reached and core inflation trending lower, we believe the RBNZ needs to return policy to a more neutral setting. We continue to expect a 50bp cut on 19th February. And a 25bp cut in April/May. The debate now centres on how far the RBNZ cut the cash rate below 3.5%. The RBNZ track signals a long pause. We think another 50bps, with risk of more.

Financial Markets

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

In rates, the downward trend continued mostly unabated

“Quite the eventful week in Kiwi rates. In saying that, the general downward trend continued mostly unabated with rates roughly 7bps lower across the curve. This was largely a function of the short end as further cuts were priced seeing the terminal rate nearly 10bps lower, further diverging from the November MPS OCR track.

Ructions in tech stocks provoked by DeepSeek led to a brief shelving of the Trump trade and the risk off playbook being pulled out. US treasuries rallied 7bps, NZD rates opening lower in sympathy by a similar magnitude. More relevant for the path for our own OCR, was the filled jobs data, which seemed to show tentative signs of recovery in the employment market. ANZ’s business confidence survey last week was also consistent with a slow recovery over 2025.

The big news for domestic fixed interest was the announcement of a NZGB 2035 syndicated tap in February. Theres likely to be good demand for this line with the 10-year bond popular with both offshore and domestic investors.

Offshore, Australian CPI printed at a level which the market took as good and a green light for a cut to the policy rate in February. Thursday’s FOMC press conference was a study for markets, with Powell saying as little as possible and avoiding commenting on statements made by Trump. In contrast, the Canadian central bank was more forthright in addressing the very real risks of tariffs to their economy.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, the Kiwi may be in a holding pattern for now

“The Kiwi dollar has found some solid support at the 0.5650 level, and may now be in a bit of a holding pattern in the 0.5500-0.5750 range. However, the escalation of the potential trade war has muddied the waters somewhat, with a tit-for-tat situation now unfolding, with Canada applying retaliatory 25% tariffs on a broad array of US goods. Mexico have also said that they will retaliate in some form against their own 25% tariff, but have stopped short of providing the details. China has yet to respond to the 10% tariff that comes into effect tomorrow. There was an immediate impact on the Kiwi dollar on Monday, with the Kiwi trading from 0.5635 on Friday down to 0.5580 this morning. While we expect to see the Kiwi on the back foot as this situation likely escalates, we do think there is some solid support for the Kiwi around the 0.5550 level. We are now anticipating that the Kiwi dollar will trade in a holding pattern range between 0.5500-0.5700 for now, until we get more of a steer from the RBNZ later this month, and the US trade situation becomes a little clearer. We have little in the way of data, but do see our labour market stats this week. We are expecting a further uptick in unemployment. This is the last major piece of data for NZ before the RBNZ’s meeting this month. We are still expecting a 50bp cut. With the RBNZ cutting, and the Fed on hold for now, with only a small number of cuts expected from the Fed this year, we are expecting that the interest rate differential will still be a major driver for the Kiwi dollar, and therefore it will be very much capped on any upside potential above 0.5700. As far as the NZDAUD cross goes, we no longer think that it will drive down into the 0.8800-0.8900 levels, but will remain around the current 0.9000 levels. There is potential for 0.9100+ should the RBA deliver rate cuts sooner than anticipated.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Labour market data for the December quarter is the main domestic event this week. Labour market conditions likely weakened into the end of 2024. Jobs growth probably slowed further with employment recording a second straight quarterly decline. The unemployment rate likely rose to a four-year high of 5.1%. Participation in the jobs market also continues to ease from record highs (see above for our preview).
• US nonfarm payrolls for January will likely show hiring slowed over the month. Market consensus expects around 165k jobs added over the month, a slowdown from December's 256k gain. The unemployment rate was probably held steady 4.1%. By the Fed's assessment, such an outturn signals solid labour market conditions.
• The Bank of England is widely expected to deliver a 25bp rate cut as weak growth and a slowing labour market demands looser policy settings. Around 100bps of rate cuts may be in store for the UK economy to help simulate activity.
• Annual inflation in the Euro area was likely stable in January at 2.4%. Beyond January, inflation is expected to drop closer to 2% in February with further declines in Q1 as services inflation continues to moderate. Core inflation too appears to have held steady at around 2.7%yoy. Alongside weak economic growth, the ECB is expected to more cuts to interest rates in 2025.

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