The kiwi ended the week lower,with its moves tied closely to the data and global events. It came under pressure early in the weekafter the softer labour market report, which showed unemployment rising and employment falling, and which we think encouraged some caution around the RBNZ’s tightening path. It then recovered through the middle of the week as the US dollar weakened on theDemocratic midterm sweep,before the strong US payrolls report on Friday sent the currency sharply lower as December Fed hike expectations were revived.Locally, the key focus was the Q3labour market survey whichpointed to ongoing softness. Theunemployment rate edged up to5.7% from 5.6%, a little above the5.5% the Bank and the markethad pencilled in, and it has nowclimbed in nearly every quarterfor close to five years. Employment unexpectedlycontracted by 0.1% when a gainof around 0.3% was anticipated,and the participation rate easedto 70.4%. This largely unwindsthe unusually strong householdsurvey readings from Q2 theimprovement at the time.
Wage growth remained subdued despite cost of living pressures,with the Labour Cost Index up0.5% in line with expectations.Private sector wages rose 0.4%while public sector wagesposted a surprisingly large 0.7%increase. A notable number of employers cited cost of living adjustments for pay rises,although many of the increases were well below headline inflation.Overall we see the details assoft from the RBNZ’s perspective, with rising unemployment pointing to more slack than the Bank hoped tosee after a year of economic growth. That should encourage the more dovish members of theCommittee, who see limited scope for inflation shocks toflow into second round effects.Even so, we still expect the RBNZ to raise rates in December, with few major data releases left before the Decemeber meeting - where the bank will also release its updated economic forecasts inits Monetary Policy Statement.
US midterms were the main focus this week, with theDemocrats winning both the House and the Senate.The midterm elections delivered a comprehensive victoryfor the Democrats, who regained control of Congress withwins in both chambers. Forecasts point to at least 245seats in the House and 54 in the Senate, with a handful ofraces still to be called. Voters turned against PresidentTrump amid broad dissatisfaction with the cost of living,tariffs and the Iran war, and even Republican strongholdssuch as Texas, Kansas and South Carolina swung to theDemocrats for the first time in decades.The dollar eased on the result, with the US DXY fallingaround 0.5% point during Asian trading on Wednesdaywhile the 10 year Treasury yield barely moved. We see theoutcome as mildly bearish for the USD but not a gamechanger. Gridlock should limit the scope for further fiscalstimulus and tax cuts, which could take some heat out ofthe Treasury selloff and narrow the US rate advantagethat has supported the dollar.We think the downside will prove limited, as the result waslargely priced in and Trump retains his veto, which meansCongress can block new spending but cannot unwindexisting measures. Treasury yields should also stayelevated while the Iran war keeps energy prices andinflation expectations high.Focus then turned to US NFP for October which wasstrong across the board. Payrolls rose 165k against aconsensus of 75k, with 84k of upward revisions to theprior two months, and the unemployment rate slipped to4.1% from 4.2%. Wages also surprised, rising 0.4% MoMand 3.1% YoY compared with expectations of 0.3% and2.9%. Healthcare and education led the gains once again,while manufacturing added 19k jobs and has now created86k positions over five months after three years ofdecline, helped by cheap domestic energy, heavy techinvestment and, at the margin, tariffs, with leisure andhospitality the main drag. The report revives the case for aDecember Fed hike, which had slipped to close to a cointoss in recent days but is now back to around 20bp priced,and we continue to expect the Fed to deliver.
Elsewhere The Bank of England also raised its policy rateby 25bps to 4.00%, its first hike since 2023, in a decisionthat was far more hawkish than expected. All nine MPCmembers voted to hike versus the 7 to 2 split anticipated,with Mann even arguing for 50bps. Guidance was openended as we expected, with Bailey saying this should notbe seen as the start of a long sequence of hikes but isunlikely to be the last unless the Middle East conflict isresolved. Greene, Lombardelli and Pill all flagged furthertightening, which keeps a February hike firmly on thetable. Upgrades to the inflation forecast, which now peaksaround 5% in Q2 2027, and to growth added to thehawkish tone. We think market pricing still looks tooaggressive, as Bailey acknowledged that part of the movein the yield curve reflects risk premia rather than expectedrates, though another hike in early 2027 looks a good betunless there is good news on Iran soon. Turning to oil markets, Brent crude prices ended the weeknear $98/bbl, rebounding from its midweek low of $94/bbl. The earlier sell-off during the week came as tradersweighed whether a Democratic sweep could bring theMiddle East conflict closer to an end, with Vice PresidentVance blaming the Republican losses on the war andDemocratic leaders pledging to wind it down. The reboundreflected a return to reality, as Iran still controls the Straitof Hormuz and is unlikely to relinquish it, with tankerattacks continuing at close to a record pace and flowsthrough the strait running below 60% of capacity. SaudiArabia also issued warnings for its Red Sea export hub atYanbu as Houthi attacks continue. Fuel products remainthe tighter part of the market, with Ukrainian droneshitting the Ryazan refinery for the second time this weekand US distillate inventories falling below 100 millionbarrels for the first time since 2003.
