NZ faces higher US tariff; labour market soft
NZ goods sold into the US are set to face a 15% tariff. This is a lift from the 10% that was put in place earlier this year. In addition to a higher rate, another adverse factor this time around is that NZ goods will no longer be facing the lowest possible tariff rate into the US. We anticipate this Wednesday’s Q2 labour market data to portray a softer market than the RBNZ published in its May MPS. Inflation expectations data is due too
Q2 Labour Market Preview
We expect next week’s data to portray a weak labour market via a dip in employment, push higher in the unemployment rate, and easing wage inflation. The labour market looks to be tracking softer than the RBNZ forecast in May. Today’s filled jobs data supports that view. Business and consumer confidence updates are due this week.
Green Light for August Easing
Any fear that today’s CPI outturn (0.5% for the quarter, 2.7% for the year) might convince the RBNZ to keep its finger on the pause button should have been shattered by the news that prices rose “just” 0.5% in the June quarter. We think an August cut is now as close to a done deal as can be the case.
Turning to inflation
The last few days have seen a number of high frequency activity indicators support our view that not only did the economy stall in the June quarter but it is also struggling to gain momentum going into Q3. Indeed, so poor have these indicators been that we have lowered our expectation for Q2 GDP to -0.2%, from zero, and have made exactly the same adjustment for Q2 employment. Attention turns to inflation over the coming week, with June Selected Prices on Thursday ahead of the Q2 CPI next Monday.
Eyes on RBNZ
Last week, we moved to expect no change in the OCR at this week’s RBNZ meeting. That is not to say we don’t still think there is a chance of, and indeed a strong case for, a 25bp OCR cut this week from its current 3.25%. But we reached the conclusion that it will be hard for the RBNZ to cut at this meeting largely because post the May MPS it suggested market pricing would be a key driver of its decision. The market is currently pricing little chance of a cut on Wednesday. As for data, the June PMI due on Friday is of most interest after last month’s plunge.
In confidence . . .
It is looking increasingly likely the RBNZ will stand pat when it delivers its July 9 Monetary Policy Review. Our formal view is for a 25 basis point cut but we recognise that the odds of this are diminishing by the day. Be that as it may, we think changing our call before seeing Tuesday’s NZIER Quarterly Survey of Business Opinion would be ill-advised.
Tensions and Trade
Further escalation in Middle East tension over the weekend brings an expectation of risk off and higher oil prices. If the oil price lift were to persist or extend, it threatens a lift in the cost of imports and to put upward pressure on inflation and potentially inflation expectations. None of this would be good for growth. This week’s trade data for May is expected to show very strong export growth and a rapidly narrowing annual deficit.
Economy Hits Q2 Brick Wall
Timely indicators like the PMI and PSI suggest the economy hit a brick wall during Q2. This does not deny what looks like a firm expansion in Q1, expected to be confirmed in this week’s data. May’s selected prices are expected to support our view that annual inflation pushed higher in Q2. A significant escalation in Middle East tensions has seen oil prices spike, adding yet more uncertainty to the global economic outlook. NZ’s large current account deficit is seen narrowing in Q1.
Q1 GDP Preview
We expect next Thursday’s Q1 GDP data to confirm further economic recovery. The output gap still appears wide and there is much uncertainty around the path ahead, but recovery looks as though it continued in the first quarter of the year.
Trade Mixed For Q1 Growth
Issues surrounding tariffs continue to keep global economic uncertainty elevated. It keeps coming. Today’s Q1 goods trade data looked highly supportive of Q1 growth, while services trade looked the polar opposite. We await more Q1 GDP partials over the coming week. The trade data confirmed rising tradeable inflation which we think is peaking.
RBNZ to cut this week
We expect the RBNZ to cut the OCR by 25 basis points on Wednesday and signal further reductions ahead. Whatever the Bank does, it needs to highlight the massive uncertainty that is pervasive, and the fact that such uncertainty means very little about the future can be taken for granted including future interest rate settings. Business expansion plans may be curtailed by uncertainties offshore. New season milk price forecasts are due and likely to be solid.
RBNZ to continue easing
Donald Trump’s policy machinations are making it a horrible time to be a central banker. But decisions still have to be made, and we think the negative growth impact of the US administration’s policy gyrations add to the need for the RBNZ to continue its easing cycle. Meanwhile, the 2025 Budget takes centre-stage. We expect multiple new spending announcements but the majority of which will be funded from savings made elsewhere.
Activity indicators feature
Sadly, the only game in town is Mr Trump and his tariff antics. However, while we remain at the mercy of offshore developments there are still domestic indicators that need to be watched closely for first indications as to how international developments might start to impact local activity. The key data we will be watching over the next week will be the BNZ-Business NZ Performance of Manufacturing Index, released Thursday, and the Performance of Services Index Monday May 19.