New Zealand Unemployment Hits 11-Year High, Fading Rate Hike Bets and Weakening Kiwi

What happened

New Zealand's unemployment rate reached 5.7% in the third quarter, the highest level since 2015, surpassing expectations of 5.5% from economists and the Reserve Bank of New Zealand (RBNZ) itself. The data, released on Wednesday, showed a 0.1% fall in employment from the previous quarter, against a forecast rise of 0.4%, and the participation rate slipped to 70.4%. Additionally, private sector wage growth slowed to 0.4% quarterly and 2.0% annually.

These figures were released just days before the country's general election, with inflation and the cost of living being voters' top concerns. The Labour Party criticized the government's economic management, while the finance minister defended sticking with the current plan. The RBNZ, which surprised markets last week by holding its official cash rate at 2.75%, had signaled the possibility of further increases, but the new labor market data appears to justify the pause and may reduce the need for additional hikes.

Why it matters

The weak New Zealand labor market data has significant implications for the RBNZ's monetary policy and the political landscape. The rise in unemployment and the slowdown in wage growth indicate a cooling economy, which tends to ease inflationary pressures and, consequently, reduce the need for the central bank to further tighten monetary policy. Markets have already reacted by pricing in a lower probability of a December rate hike.

Furthermore, the proximity of the general election adds a layer of uncertainty. The Labour Party, if elected, has pledged to restore a dual mandate for the RBNZ, which would include both price stability and maximum sustainable employment, rather than its current sole focus on inflation. A shift to a dual mandate could be interpreted by markets as tilting the RBNZ towards easier monetary policy over time, which would have lasting implications for the New Zealand economy and its assets.

Market impact

• Interest rates and bonds: New Zealand government bond yields, such as two-year swap rates, fell by about 6 basis points after the data release. This reflects reduced expectations for RBNZ rate hikes, which tends to increase the value of existing debt securities. The prospect of looser monetary policy in the future may keep yields under downward pressure.
• Dollar and exchange rates: The New Zealand dollar (kiwi) dipped on the news and has continued to drift lower. Reduced rate hike bets make the currency less attractive to yield-seeking investors. The policy gap with other central banks, such as the Reserve Bank of Australia (RBA), which remains hawkish, may leave NZD/AUD vulnerable to further weakness.
• Equities: While the news does not directly mention the impact on equities, a scenario of slower economic growth and potential monetary easing can have mixed effects. Lower interest rates can be positive for companies with debt or those reliant on credit, but underlying economic weakness may weigh on corporate earnings.

What to watch

Investors should closely monitor the following events:

• New Zealand general election: The outcome of Saturday's election will be crucial, especially if the Labour Party wins and seeks to implement a dual mandate for the RBNZ. This could fundamentally alter the approach to monetary policy.
• Inflation expectations surveys: Inflation expectations surveys, due later this month, will be a key test of whether the RBNZ's hawks can still make their case. If inflation expectations remain elevated, there might be some pressure for the RBNZ to consider future hikes, despite the labor market data.
• Upcoming RBNZ decisions: Future RBNZ communications and decisions will be essential to confirm whether the cooling labor market trend truly eliminates the need for further monetary tightening.

Scenarios

Base scenario: The RBNZ holds interest rates steady in the short term, awaiting further data. The kiwi remains under pressure due to lower hike expectations and election uncertainty. Bond yields tend to stabilize or fall marginally. Risk scenario: A Labour Party victory and the implementation of a dual mandate lead the RBNZ to a more dovish stance, further weakening the kiwi and pushing bond yields lower. Alternatively, if inflation expectations surprise to the upside, the RBNZ might be forced to reconsider hikes, leading to volatility.

Original source: ForexLive (InvestingLive). For information only, not investment advice.