Jobs data offers ‘no smoking gun’ for interest rate cuts next week

Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

Odds on the Reserve Bank cutting rates next week have been pared back after unemployment data showed a solid rise but offered “no smoking gun” evidence for an early move.

In the wake of this week’s market turmoil, expectations for a cut being delivered with next Wednesday’s Monetary Policy Statement had risen to the point that financial markets had priced in odds of 92%.

After the data was released those odds were trimmed back to 50/50.

That was despite RBNZ forecasts still pointing towards cuts next year and most economists picking October or November as the starting point

“The big question going into today’s release was whether slack in the labour market is opening up faster than the RBNZ expected, and if so, whether that could bring them closer to cutting the OCR,” said ANZ senior economist Miles Workman.

The answer to that question was “a hard no”, he said.

Unemployment rose to 4.6% in the June quarter from (a revised) 4.4% in the March quarter. That was bang on RBNZ expectations and slightly below the consensus expectation of economists at 4.7%.

The number of unemployed people unemployment rose by 33,000 to 143,000.

Employment was also stronger than their forecast, and wage measures were either in line or mildly stronger, Workman said.

The data showed that spare economic capacity was building and that disinflationary progress was set to continue, he said.

“However, we don’t think there’s enough here to bring OCR cuts forward to as early as next week. In fact, on their own, today’s data tilt the risk profile a little more in favour of our OCR forecast for cuts from November.

“Yes, there’s been a deterioration in the timelier data, but relative to the May MPS forecasts, the [second quarter] labour market data is no smoking gun for early cuts.”

The Kiwi traded up to US59.92c from US59.53c just before the job market data release.

Another surprise was the lift in the labour participation rate, Kiwibank senior economist Mary Jo Vergara noted.

“After hitting a record high of 72.4% in June 2023, the participation rate had begun its descent. But over the June 2024 quarter, it edged up – from an upwardly revised 71.6% (previously 71.5%) to 71.7%,” she said.

“Despite clear evidence of the decline in job ads, it seems that people are still trying their luck with the Kiwi labour market. The downtrend should resume over the coming year. As the economic slowdown continues, demand for workers will wane and people will head (or be forced) to the exits.”

But the underutilisation rate was a better measure of slack in the market, she said.

“And the ongoing rise suggests that spare capacity within the broader market is growing. Over the June quarter, the underutilisation rate rose to 11.8% from 11.2% - the highest since March 2021.

“Measures beneath the umbrella term also moved higher with the underemployment rate – those working part-time and wanting more hours – rising from 4.1% to 4.2%.”

Wage data showed an easing in the pace of growth.

“Labour cost increases were generally in line with RBNZ expectations but higher than the market consensus,” said ASB’s Mark Smith.

Labour costs advanced 0.9% [from the previous quarter] for the private sector (excluding overtime). Annual Labour Cost Index inflation eased to 3.6%, a 2-year low.

“Likely catalysts included the lower April increase in the minimum wage (up just 2% to $23.15 per hour versus the close to 7% average annual increase over the previous 5 years), acute pressures on firm profitability, the increasing availability of workers and slowing increases in the cost of living.”

He noted that private sector labour costs showed generalised cooling across industries. Meanwhile, public sector labour costs advanced at a strong 6.9% annual rate with rises strongest in education and healthcare.

“But we expect wage pressures from the government sector to sharply cool as the government applies the spending brakes,” he said.

One grim statistic in the data provided a reminder of the impact economic downturns have on younger generations.

Annually, unemployment for people aged 15-24 years rose 14,400 and under-utilisation rose by 29,300, not seasonally adjusted.

In April, May and June this year, compared with the June 2023 quarter, unemployment rates for people aged 15-19 were 20.7%, up from 15.1%.

And for those aged 20-24, it was 8%, up from 5.8% a year earlier.

“So where to from here?” asked ASB’s Smith.

“Given the soft outlook for economic activity and the likelihood that firms will look to cut labour costs to restore battered profitability, we expect the NZ unemployment rate to continue to move up and move above 5% by year-end and potentially push higher still in 2025.”

Wage inflation should also sharply cool and significantly dampen pressures on core CPI inflation, he said.

“There is the risk that the labour market could weaken significantly from here and this could cause longer-term economic damage if the RBNZ keeps as much pressure on the monetary policy brakes.

“Despite today’s stronger-than-expected labour market figures, we do not expect it will be long before the RBNZ cuts the OCR. We continue to expect at least 50bps of OCR cuts by year-end (we have pencilled in 25bp cuts in October and November), but we still view the August meeting to be very much ‘live’.”

Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003.