The kiwi eased steadily through much of the week, weighed down by relatively solid US PCE data even as domestic releases did little to alter the picture either way. The currency did attempt a modest recovery mid-week, but this proved short lived, with the kiwi extending its decline sharply late on as Fed Chair Kevin Warsh struck a hawkish tone at the Jackson Hole Symposium, driving broad based US dollar strength.
Locally, the focus was on a soft Q2 retail sales print. Headline volumes fell 0.5% QoQ, with the weakness concentrated in fuel (-13%), accommodation (-8%), and motor vehicle and parts (-2.3%). Core retail volumes, which strip out fuel and motor vehicle and parts, rose 0.7% QoQ, suggesting spending outside the areas directly hit by the Middle East disruption is holding up well. Sales values told a slightly firmer story, up 0.9% QoQ as price effects offset the volume decline, with nine of the 15 categories posting higher sales values through the quarter.
The filled jobs survey for July also came in solid, with filled jobs rising 0.3% MoM and continuing their gradual uptrend, though June's figure was revised down. Annual growth held at 0.8% YoY, with services jobs up 0.9% YoY comfortably outpacing goods-related jobs at 0.4% YoY. The data supports our view that labour demand remains robust, and that the tick up in Q2 unemployment reflected stronger labour supply outpacing still-solid demand, rather than any underlying weakening.
Looking ahead, the focus turns to the RBNZ meeting on Wednesday, where we expect the bank to raise the OCR by 25bp to 2.75%. Inflation for Q2, at least at the headline level, surprised to the upside at 4.1% YoY, driven largely by conflict-related fuel costs, but underlying measures have remained contained, and more recent indicators, including softer SPI data and lower inflation expectations, support our view that the overshoot will prove temporary. The labour market has also softened by more than the RBNZ expected, though again, this owes more to stronger labour supply than weaker demand. Taken together, we expect the RBNZ to hike next week but favour a shallower path than markets currently price, with our base case for just one further hike in February 2027, against a market view of the OCR reaching 3% by year end.
Additionally, the RBNZ will publish updated projections in its September MPS, though we expect the changes to be fairly limited. We see a modest upward revision to the Q3 inflation forecast, which was cut to 3.3% in July just ahead of the stronger Q2 CPI print, while the labour market outlook should be little changed, with softer unemployment offset by stronger employment growth. On growth, resilient higher frequency data raise the risk of a modest upward revision to the bank's flat Q2 forecast. Overall, we expect the OCR track to look broadly similar to May's, with a peak of ~3.3% still looking reasonable.
Globally, the focus was on US PCE data, which came in a touch stronger than expected. Nominal spending rose 0.2% MoM in July, though this was flat once adjusted for inflation. More importantly for the Fed was the inflation measures, with the headline PCE deflator rising 0.2% MoM (above the 0.1% expected) and up 3.7% YoY, while core also rose 0.2% MoM and 3.3% YoY, in line with expectations. Overall, the data continued to show little sign of inflation creep from oil or elevated semiconductor prices, though annual inflation does remain elevated. Indeed, with inflation still sitting well above the Fed's target and the Middle East conflict posing a continued upside risk, we think the markets case for a tightening bias remains intact. However, we don't share this view, as we believe there are pockets of softness in the US economy (particularly in the labour market), and as a result, don't believe the Fed will move rates this year.
Attention then turned to Fed Chair Kevin Warsh's speech at Jackson Hole, where he struck a notably hawkish tone, warning that inflation was not slowing meaningfully and that policymakers still had work to do if that failed to change soon. Warsh pointed to the Fed's preferred inflation gauge running at 3.7% annually and annualising at 4.1% over six months in July, well above target, while suggesting current policy settings weren't clearly restrictive enough to weigh on growth. He also described the labour market as broadly sound, framing price stability as the Fed's dominant concern.
The remarks were widely read as a deliberate clarification after his non-committal July press conference, prompting markets to quickly reprice the odds of a September hike to 50/50, alongside a jump in short term yields and broad based US dollar strength. Given the clear emphasis on inflation risk over growth concerns, we read this as a genuine hawkish shift in the Fed's reaction function for now. That said, we maintain our view that the Fed will likely look through this given pockets of underlying softness in the US economy, and don't expect a move this year.
Turning to the Middle East, Brent crude stabilised somewhat this week, settling near $88/bbl after touching around $95/bbl earlier on. Prices did edge back up late in the week as hopes for a reopening of the Strait of Hormuz faded. Iran and Oman had reached a revenue-sharing agreement on the waterway earlier in the week, before President Trump reportedly stated he had no interest in reverting to the terms of the prior memorandum of understanding. The White House further confirmed it isn't negotiating with Iran and that the naval blockade on Iranian ports remains in place.
The stalled progress on Hormuz has also spilled into gas markets. The stalled progress on Hormuz has also spilled into gas markets, with European benchmark futures reversing recent declines as concerns mount over restocking depleted storage amid growing competition from Asian buyers. LNG cargoes have become increasingly sought after in the region, pushing prices sharply higher versus the start of the year.
