Central Banks Remain In Focus, As The Herd Of Policymakers Head South For The Northern Winter

• A Fed cut next week is all but a done deal. But market traders are still tossing up between a 25bps and 50bps cut to kick off the cutting cycle. The mixed US payrolls print didn’t help the debate.
• As the Fed deliberates its first move, the cutting cycles of many of its peers are well underway. The Bank of Canada delivered its third straight 25bps cut last week. And the ECB will likely resume its rate cuts this week as inflation and growth in the Eurozone weakens.
• Our COTW looks at Stats NZ’s building activity data which showed the lowest building volumes since the COVID. It’s not pretty. And it’s a step in the wrong direction for our housing crisis.

Here’s our take on current events

Without much to play with locally, our attention turns to offshore developments. Over in the US, the Fed will cut interest rates next week – it’s all but a done deal. It will be the first cut in four years. But uncertainty surrounds just how big the first move will be. Fed Chair Powell muddied the water by emphasising the risks to employment in his speech at Jackson Hole a fortnight ago. Powell remarked – “We do not seek or welcome further cooling in labour market conditions… We will do everything we can to support a strong labour market as we make further progress toward price stability”.

Financial market participants have been debating a 25bps or 50bps move to kick off the cutting cycle. The August payrolls prints was expected to settle the debate. The report, however, was a mixed read. Over the month, the US economy added 145k jobs compared to forecasts of 165k. And there were chunky revisions to the previous two months. July was revised down by 25k, while a substantial 61k was taken out of June. Average payrolls over the last three months is now at the lowest level since March 2020. One for the doves. The unemployment rate fell, as expected, from 4.3% to 4.2%. But rounded to the second decimal point, it’s a dip of just 3bps (from 4.25% to 4.22%) – so hardly a significant improvement. The underemployment rate, a broader measure of slack in the market, climbed to the highest since October 2021 at 7.9%.

Something to appease the hawks was the strong lift in wage growth. Average hourly earnings picked up the pace in August, increasing 0.4% from 0.2% in July. On an annual basis, wage growth accelerated to 3.8% from 3.6%.

For all the anticipation leading up to the August payrolls print, market traders are still left scratching their heads. The data is bad, but not terrible. Whether the Fed will opt for a 25bps or 50bps cut, the outcome still feels as likely as a game of petal-picking. For an economy that is slowing, but not crashing, a steady easing cycle of 25bps cuts at a time – reserving the right to be more aggressive down the line – would be the most likely approach.

As the Fed deliberates its first move, the cutting cycles of many of its peers are well underway. The Bank of Canada delivered its third straight 25bps cuts last week, taking its key benchmark rate to 4.25%. The BoC meet another two times this year, and a further 50bps of easing are expected by year-end. Next up is the European Central Bank who meet this week. The ECB will likely resume rate cuts after pausing in July. Inflation and economic growth in the eurozone both have proven weaker than expected, prompting the ECB to deliver more rate relief.

Here at home, the past couple of weeks has had us in a bit of a holding pen for any major data releases. But high frequency data, along with partial indicator data for the upcoming June quarter GDP numbers, have been keeping us busy. Last week we saw our terms of trade lift a modest 2% over the June quarter driven largely by a lift in prices across dairy and meat. Countering that good news, however, building activity continued its slump over the quarter. See our Chart of the Week for more.

Chart of the Week: The building bust continues.

Last week we covered the disappointing though unsurprising drop in building consents. Over July, consents lifted 26%. Which sounds pretty good. Especially given that that’s up from a 17% contraction in June. But looking under the hood it’s a much uglier story with annual building consents still down over 20%. So as expected, actual building activity isn’t any better. Stats NZ’s building activity data showed the lowest volume of building activity seen in a June quarter since the COVID-impacted June 2020 quarter. Compared to the beginning of the year, the seasonally adjusted volumes of total buildings fell 0.2% with residential falling 0.7% and non-residential falling 0.1%. And over the year, the volume of total buildings completed is down 6%.

We said it last week, and we’ll say it again. We hate to see the fall in construction. But we aren’t surprised by the numbers. We desperately need a solution to housing supply. The chronic shortage of supply is the driving force behind our housing crisis. Not demand. The hope and ‘good news’ here at least, is that this is old lagging data. We’ve now had a rate cut from, the RBNZ. And expect many more. As interest rates are relaxed we should see a breath of life back into the construction sector. That said, if history is anything to go by, fixing our chronic housing shortage will require more than just a lower interest rate environment.

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