Brown Brothers Harriman’s (BBH) Elias Haddad notes the New Zealand Dollar and local yields slumped after strong Q2 employment and wage gains were offset by rising labor supply and higher unemployment. Despite evident slack, Haddad argues NZD can still edge higher, supported by above-target inflation, a relatively favorable growth outlook, and expectations for further Reserve Bank of New Zealand tightening.
Strong jobs data fail to erase labor slack
“NZD and NZ yields slump. New Zealand’s solid Q2 job and wage growth mask ongoing labor market slack. Employment surged 0.5% q/q vs. 0.1% in Q1, well above consensus and RBNZ projection of 0.1%, while private regular wages were up 0.7% q/q (consensus & RBNZ: 0.6%) vs. 0.5% in Q1.”
“However, strong hiring was more than offset by rising labor supply (participation rate rose 0.2ppt to 70.7%), lifting unemployment and pointing to excess labor supply.”
“The unemployment rate rose 0.2ppt to 5.6% (consensus & RBNZ: 5.4%), the highest since Q3 2015 and the underutilization rate increased 0.9ppt to 13.8%, the highest since December 2013.”
“Nevertheless, NZD has room to keep edging higher against most major currencies. Above target inflation, more favorable domestic growth outlook, and a policy rate near the lower-end of the RBNZ’s neutral range (2.20%-4.10%) argue for additional RBNZ rate hikes.”
“The swaps curve price in nearly 100bps of cumulative tightening over the next twelve months to 3.50%.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
