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Markets

Markets initially looked on track for yet another session of summertime technical trading yesterday, counting down to Friday’s Jackson Hole address of Fed Chair Powell. European equities outperformed (EuroStoxx 50 +0.89%) as markets pondered progress in talks to end the war between Russia and Ukraine. (EMU) yields initially maintained recent gains. However, in US tech stocks fell prey to profit taking (Nasdaq -1.46%) during US dealings. In this mild risk-off, core bonds apparently attracted some safe haven flows. Gains were modest though. US yields eased between 1.5 bps (2-y) and 2.7 bps (10-y). German yields ceded up to 1.5 bps (30-y). Despite a slight loss of interest rate support and US equity underperformance (at least versus Europe), the dollar finally gained on points (DXY close 98.27; EUR/USD 1.1647). USD/JPY was exception to the rule (close 147.7 from 147.9). Most moves in the major USD cross rates still were technically irrelevant.

Yesterday’s correction in US tech stocks translates into red figures for most Asian equity markets this morning, with Taiwan, Korean and Japan underperforming. US yields are little changed as is the dollar. Later today, the eco calendar is again thin. Markets will look for some additional insights on the internal debate within the FOMC in the Minutes of the July 30 Fed meeting. However, after recent (payrolls and inflation) data and with markets looking forward to Jackson Hole, the minutes remain a bit of ‘old news’. Fed Bostic moderates a conversion on the economic outlook, but already gave his (balanced) view last week. Even in case of a further technical correction in US equities, we expect the impact on core bond yields to remain limited ahead of Jackson Hole. We’re also not convinced that a further correction in (US tech) stocks will be a big help for the dollar. The Swedish Riksbank is expected to keep its policy rate unchanged at 2.0%.

UK July inflation brought a first reality check after the hawkish BoE rate cut (August 07 meeting). UK July prices again printed on the higher side of expectations. Headline inflation rose 0.1% M/M to 3.8% Y/Y (from 3.6%). Core CPI also rose from 3.7% to 3.8%. Services inflation even accelerated from 4.7% to 5.0%. Money markets recently already doubted whether the BoE would be able to continue policy normalization at the current quarterly 25 bps pace. Those doubts won’t ease after today’s data. Sterling gains modestly immediately after the release (EUR/GBP 0.862). A revisit of the EUR/GBP 0.86 support area might be on the cards. However, sustained sterling gains probably need better growth rather than higher inflation-driven interest rate support.

News & Views

The Reserve Bank of New Zealand (RBNZ) lowered its policy rate this morning as expected by 25 bps to 3%. It was a split vote (4-2) with two governors in favor of a larger, 50 bps, rate cut. Inflation is currently around the top of the 1%-3% target band, but expected to return to 2% by mid-2026 due to spare capacity and declining domestic pressures. The economic recovery stalled in Q2 with global policy uncertainty, falling employment, higher essential prices and declining house prices all contributing. The MPC indicates scope for further OCR reductions if medium-term inflation pressures continue to ease to help the economy and labour market. Updated projections for the policy rate suggest short term potential towards 2.5% by Q1 of next year, compared with 2.75% in the May update, before returning to a neutral 3% at the end of the policy horizon. NZ markets had to reposition to the softer tone from the RBNZ. The NZD swap curve bull steepens with yields falling by 8.7 bps (30-yr) to 17.2 bps (2-yr). The kiwi dollar suffers a setback, falling from NZD/USD 0.59 to 0.5825 and losing a first technical support zone (0.5878/47; 38% YtD retracement & May low).

Japanese exports fell by 2.6% Y/Y in value in July, the steepest drop since February 2021. A downturn in cars, auto parts and steel is behind the drop. Export volumes rose by 1.2% Y/Y suggesting that Japanese companies bear the brunt of US tariffs. Exports to the US dropped by 10.1% Y/Y in value terms and by 3.2% Y/Y in volume terms. Japanese imports decreased by 7.5% Y/Y (value), mostly driven by energy. Despite this fall, the Japanese trade balance still flipped from a JPY 152.1bn surplus in June to a JPY 117.5bn deficit in July. The trade surplus with the US fell from JPY 669bn to JPY 585bn..

A selloff across US Big Tech names dampened market mood yesterday, triggered largely by mounting doubts over the AI boom. An MIT report revealed that 95% of companies investing in generative AI have yet to see returns, while OpenAI CEO Sam Altman himself warned that some sector valuations were “insane.” The comments may have been a wake-up call for investors, sparking a sharp pullback in high-flying names. Palantir plunged nearly 10% (the company is trading on a price-to-earnings ratio north of 500). Nvidia, with a P/E of 56 but vulnerable ahead of next week’s earnings, fell over 3%, while other AI-linked stocks such as Arm, Oracle and AMD also lost ground. The weakness dragged the Nasdaq down about 1.5%, its steepest drop since the start of the month, as investors rotated into defensive sectors including utilities, real estate and consumer staples.

Intel was a rare bright spot, rising 7% after a volatile month of swings tied to both political and corporate news. Earlier this month, Donald Trump had called for CEO Lip-Bu Tan to resign given his track record of investing in Chinese tech firms. Yet a subsequent White House meeting signaled improving relations, with the government announcing plans to take a non-voting stake in the company. That news drew a mixed market reaction, with concerns that the move was more about shoring up domestic production than commercial demand. Sentiment improved yesterday when SoftBank unveiled plans to buy a $2bn stake in Intel to co-develop chips that could compete with Nvidia in the AI space. Though the deal must have been backed by political sweeteners, Softbank wants to design and build a chip to compete Nvidia in the AI space, and if Intel could help them do it, there could be a solid synergy. And the latter would give Intel a seat in the AI room – a seat that the company couldn’t secure since OpenAI saw the daylight. Just last month, the company announced a $3bn loss. So, the plan is for the US government to revive Intel and Softbank take part of it. Softbank plunged more than 10% since the news broke. But a part that selloff is linked to the overall stress that there may be a bubble as the company holds big chip names as Nvidia, TSMC and ARM.

If there is a bubble to get burst, companies with relatively lower valuations, strong earnings and decent cash will be less harmed than those that are purely pushed higher on AI hype. The easiest way to see who’s more vulnerable to sharper losses is to check the PE ratios and eventually tidy up portfolios. Investors are also rushing into so-called “disaster” puts, driving put skew — the cost of downside puts relative to upside calls — to highest level in nearly three years, according to 22V Research.

But “insane” valuations are only part of the stress. Caution is also mounting ahead of Federal Reserve Chair Jerome Powell’s speech at Jackson Hole on Friday. Market bets for a September rate cut have surged since investor Scott Bessent floated the idea of a 50bp move. While that appears unlikely, the speculation has made a 25bp cut look almost certain, even as producer prices flashed a sharp increase last month. Powell now faces pressure from the government to cut rates amid a softening labour market, but also the risk of fueling stagflation if inflation re-accelerates. Trump has already criticized Powell for being “too late” on past inflation, sharpening the political backdrop.

The US 2-year yield remains near 3.75%, with expectations centering on a 25bp cut in September and another before year-end — provided inflation doesn’t spike. Any hawkish adjustment in Powell’s tone could lift yields, extend the US dollar’s recovery, and accelerate the equity selloff. Still, 22V Research notes that the average pullback in the past 18 months has been around 12.5%, suggesting a repeat of April’s 20% meltdown is less likely.

Inflation in the UK accelerated faster than expected in July. The headline figure ticked up from 3.6% to 3.8% versus 3.7% expected by analysts, core inflation also rose to 3.8% versus 3.7% expected. Stronger-than-expected CPI numbers further reduce the chances of seeing the Bank of England (BoE) cut rates in November. The BoE sees inflation further peak to 4% in the coming months. Sterling is higher after the CPI figures and has room to factor in more hawkishness amid inflation risks and past few days’ positive surprise on growth and production data.

Daily Pivots: (S1) 171.56; (P) 172.14; (R1) 172.57; More...

Immediate focus is now on 170.94 support in EUR/JPY with today's decline. Firm break there will suggest that the corrective pattern from 173.87 has started the third leg. Intraday bias will be turned back to the downside for 169.69 support, and possibly below. But downside should be contained by 38.2% retracement of 161.06 to 173.87 at 168.97 to bring rebound. On the upside, above 172.99 will bring retest of 173.87.

In the bigger picture, considering current strong momentum as seen in the rally from 154.77, corrective pattern from 175.41 could have already completed. Decisive break of 154.77 will confirm long term up trend resumption. Next target is 61.8% projection of 124.37 to 175.41 from 154.77 at 186.31. However, rejection by 175.41, followed by firm break of 55 D EMA (now at 169.95) will delay this bullish case.

There are three themes dominating currency markets today: a stronger rebound in the Yen, firming Sterling, and a sharp tumble in Kiwi. Moves are being shaped by local economic drivers as well as shifting central bank expectations, setting the stage for a cautious but active session.

Yen’s rally came alongside a steep pullback in Japanese equities, with Nikkei falling more than -1.4%. The selloff partly reflected profit-taking after the index hit fresh record highs earlier this week. Weak trade data added pressure, as exports contracted at the steepest pace since early 2021.

Autos were at the center of the decline, with shipments to the U.S. slumping heavily. There may be hope for a rebound later this year thanks to the U.S.–Japan trade deal that lowered reciprocal tariffs. But for now, investors are wary. The combination of equity weakness and poor trade data has fueled safe-haven demand for Yen.

Sterling, meanwhile, is holding firm after another upside surprise on inflation. July’s data showed both goods and services prices accelerating, suggesting that tariffs are still feeding through to consumers while domestic pressures intensify. Coupled with last week’s solid GDP numbers, the backdrop leans toward the hawks within the BoE.

Markets are beginning to doubt the likelihood of another BoE cut in November if inflation continues to surprise on the upside. Policymakers may be forced to slow their already gradual easing cycle, particularly if price momentum proves sticky heading into the autumn.

In contrast, Kiwi has dropped sharply after RBNZ cut the OCR to 3.00% with a dovish bias. Updated forecasts point to scope for one more cut this year and another in early 2026. The decision was also notable for its split: two members favored a 50bp cut, highlighting a shift toward deeper easing if growth weakens further.

Overall, Yen is the strongest performer so far today, followed by Dollar and Sterling. Kiwi is the weakest, trailed by Euro and Aussie, with Swiss Franc and Loonie in the middle.

Looking ahead, attention turns to FOMC minutes, which may reveal whether more Fed officials were sympathetic to the dovish camp after Governor Christopher Waller and Michelle Bowman dissented in July in favor of an immediate cut.

In Asia, Nikkei fell -1.49%. Hong Kong HSI is down -0.09%. China Shanghai SSE is up 0.62%. Singapore Strait Times is up 0.28%. Japan 10-year JGB yield is up 0.012 at 1.610. Overnight, DOW rose 0.02%. S&P 500 fell -0.59%. NASDAQ fell -1.46%. 10-year yield fell -0.039 to 4.302.

UK CPI jumps to 3.8%, services inflation stays hot at 5%

UK inflation accelerated more than expected in July, with headline CPI rising to 3.8% yoy from 3.6% yoy, surpassing forecasts of 3.7% yoy and marking the highest level since early 2024. The biggest driver was transport costs, particularly higher airfares, which made the largest contribution to the monthly rise in annual rates.

Breakdown data showed broad-based strength. CPI goods inflation climbed to 2.7% yoy from 2.4% yoy, while CPI services surged to 5.0% yoy from 4.7% yoy. Meanwhile, core CPI edged up from 3.7% yoy to 3.8% yoy, topping expectations and matching the headline pace, highlighting persistent underlying pressures.

For BoE, the data poses a challenge. The uptick in both headline and core inflation risks slowing the recent easing cycle, as policymakers balance still-high inflation against weaker economic growth momentum. Markets may scale back expectations for near-term cuts if the stickiness persists.

RBNZ cuts, opens door to more, NZD/USD diving towards 0.58

RBNZ delivered a 25bps cut to the Official Cash Rate, lowering it to 3.00% as widely expected. A more sizeable 50bps rate cut was discussed during the meeting. Policymakers maintained an easing bias, noting that “if medium-term inflation pressures continue to ease as expected, there is scope to lower the OCR further.”

The new projections point to the OCR dropping to 2.7% by Q4 2025, then settling between 2.5% and 2.6% in 2026 before edging back toward 2.7–2.8% in 2027. This outlook effectively signals room for one additional cut this year and another in early 2026.

The Bank highlighted ongoing slack in the economy and easing domestic inflation, projecting headline inflation to return to the 2% midpoint of target by mid-2026. However, New Zealand’s recovery has stalled, with household and business spending constrained by global policy uncertainty, weaker employment, higher costs for essentials, and falling house prices.

NZD/USD dives through 0.5855 support after the announcement to resume the decline from 0.6119. Next target is 50% retracement of 0.5484 to 0.6119 at 0.5802. As the decline is currently seen as a corrective move, there might be some support form 0.5802 to bring rebound. However, firm break of 0.5906 support turned resistance is needed to indicate short term bottoming. Otherwise, risk will stay on the downside in case of recovery.

Also, decisive break of 0.5802, coupled with downside acceleration through the near term falling channel, will suggest that NZD/USD is indeed reversing the whole rise from 0.5484. That could pave the way through 61.8% retracement of 0.5727 to wards 0.5484 low.

Japan exports slump -2.6% yoy in July, U.S. auto shipments hit hard

Japan’s exports fell -2.6% yoy in July to JPY 9.36 trillion, the sharpest drop since February 2021, driven by weaker demand from its two largest markets, the U.S. and China. Exports to the U.S. slid -10.1% yoy, with auto shipments plunging -28.4% yoy, a steeper decline than June’s -26.7%. Shipments to China also contracted -3.5% yoy, though exports to Hong Kong surged nearly 18% yoy.

The latest weakness highlights how external headwinds continue to weigh on Japan’s trade sector. While Tokyo reached a deal with Washington on July 22 to reduce reciprocal tariffs to 15% from 25%, the benefits will not be reflected until the August trade data. For now, auto exports remain a key drag on overall performance.

Imports fell -7.5% yoy to JPY 9.48 trillion, leaving Japan with a JPY 118 billion deficit. In seasonally adjusted terms, exports slipped -0.2% mom, while imports rose 0.4% mom, pushing the deficit wider to JPY 303 billion.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 171.56; (P) 172.14; (R1) 172.57; More...

Immediate focus is now on 170.94 support in EUR/JPY with today's decline. Firm break there will suggest that the corrective pattern from 173.87 has started the third leg. Intraday bias will be turned back to the downside for 169.69 support, and possibly below. But downside should be contained by 38.2% retracement of 161.06 to 173.87 at 168.97 to bring rebound. On the upside, above 172.99 will bring retest of 173.87.

In the bigger picture, considering current strong momentum as seen in the rally from 154.77, corrective pattern from 175.41 could have already completed. Decisive break of 154.77 will confirm long term up trend resumption. Next target is 61.8% projection of 124.37 to 175.41 from 154.77 at 186.31. However, rejection by 175.41, followed by firm break of 55 D EMA (now at 169.95) will delay this bullish case.

 In focus today

The minutes from FOMC's July meeting will be released this evening but given that the meeting was held before the latest weak Jobs report, markets' main focus remains on the timelier Fed commentary.

Inflation data will be interesting to gauge after investors have backed off bets on further rate cuts from the Bank of England (BoE) due to the somewhat more hawkish guidance at the recent BoE meeting and a labour market which is probably not as weak as feared. Headline inflation was 3.7% in June after prices increased more than expected. Like we also see it in the Nordics, food prices is a key inflation driver.

Economic and market news

What happened overnight

In New Zealand, the Reserve Bank (RBNZ) continued its easing cycle with a 25bp rate cut early, lowering the Official Cash Rate to 3.00% in line with market consensus.

In Japan, exports recorded their steepest decline in four years as US tariffs weigh on the economy. Exports fell by 2.6% y/y (cons: -2.1%) and imports dropped by 7.5% y/y (cons: -10.4%). Notably, exports to the US declined by 10.1% y/y, driven by the 25% tariffs on automobiles and auto parts that appear to significantly impact trade with the US, which accounts for about 18% of total Japanese exports. The Japanese trade balance saw a significant unanticipated shift into negative territory of JPY -117.5bn (cons: JPY 196.2bn).

What happened yesterday

In the US, President Trump conceded in an interview that Russian President Putin may not be interested in making a deal at all and ruled out sending US troops to Ukraine. Trump plans on monitoring Putin's course of action over the coming weeks and warned Putin that he would risk facing a 'rough' situation in a no deal scenario.

In China, the premier Li Qiang called for more action to boost consumption and investments in a meeting with his cabinet. It follows the weak data report for July released on Friday and the Politburo meeting in July calling on stepping up support at an appropriate time.

Equities: Equities retreated yesterday despite a European rally and with 8 out of the 11 sectors in S&P 500 closing higher. In other words, the sell-off was entirely tech-driven, absent a clear trigger. The result was a sharp defensive rotation and pronounced value outperformance, with small caps even outperforming large caps and, notably, Min Vol outperforming as well. This mini correction in tech comes not only after a strong run recently, but essentially since the post-"liberation day" bottom in April. Over recent weeks, leadership has narrowed further into a handful of mega-cap tech names, many of which had reached fresh absolute and relative highs.

Yesterday's session was broad and largely devoid of macro headlines - neither weaker data, Fed expectations ahead of Powell's Jackson Hole remarks, nor earnings were in play. Rather, this was a textbook case of profit-taking after a powerful tech rally, which then cascaded into a negative feedback loop. In the US yesterday, Dow +0.02%, S&P 500 -0.6%, Nasdaq -1.5%, and Russell 2000 -0.8%. Asia is following suit this morning, with tech-heavy indices under pressure - Taiwan down around 2.5% at the time of writing. Futures in both Europe and the US are pointing lower, again led by weakness in the tech complex.

FI and FX: US equities dropped through yesterday's session with rate-sensitive sectors such as tech underperforming defensives. US rates moved slightly lower in line with the deteriorating risk sentiment, while EUR rates held steady. The volatility in FX markets was very modest as markets await Jackson Hole and August PMI data. EUR/USD closed at its 1.165 starting point. The drop in risky assets during yesterday's US session weighed on energy/commodity prices which in turn triggered NOK FI overperformance and left NOK FX as one of the clear session losers. EUR/NOK is back close to the 12.00 threshold.

UK inflation accelerated more than expected in July, with headline CPI rising to 3.8% yoy from 3.6% yoy, surpassing forecasts of 3.7% yoy and marking the highest level since early 2024. The biggest driver was transport costs, particularly higher airfares, which made the largest contribution to the monthly rise in annual rates.

Breakdown data showed broad-based strength. CPI goods inflation climbed to 2.7% yoy from 2.4% yoy, while CPI services surged to 5.0% yoy from 4.7% yoy. Meanwhile, core CPI edged up from 3.7% yoy to 3.8% yoy, topping expectations and matching the headline pace, highlighting persistent underlying pressures.

For BoE, the data poses a challenge. The uptick in both headline and core inflation risks slowing the recent easing cycle, as policymakers balance still-high inflation against weaker economic growth momentum. Markets may scale back expectations for near-term cuts if the stickiness persists.

Full UK CPI release here.

• The RBNZ reduced the OCR by 25bps to 3.00% as expected.
• But the forward guidance was very dovish – 1.5 cuts by year end are projected.
• The decision was reached following a 4 – 2 vote on the options of a 25bp vs 50bp cut – emphasising the significant shift in strategy.
• The RBNZ unexpectedly made large cuts to the near-term growth view – 1.6% growth is now expected in 2025, some way south of our own 2.4% estimate.
• The Governor said there was comfort around the midpoint of the new forecasts but more of a deviation of views around the balance of risks.
• Westpac expects two further 25bp cuts this year and the OCR to trough at 2.5% from there.
• We retain the view that interest rates will rise from at least the end of 2026 – we will review the timing further in coming months.

Key messages from the RBNZ today.

As was widely expected and almost fully priced by the market, today the RBNZ announced a further 25bps reduction in the OCR to 3.0%. However, in a dovish surprise to the market, two of the six committee members voted for a 50bps cut, and the revised projections lowered the terminal rate by 30bps to 2.55% (versus 2.85% in their previous forecasts).

The following are the key take-outs from the record of meeting:

• The OCR forecast of 2.71% for the December quarter implies at least one cut in the OCR at the next meeting in October, with around a 50% chance of a follow-up cut at the November meeting.
• The RBNZ estimates that economic activity contracted 0.3% in the June quarter and expects that growth will remain subdued in the September quarter (forecast: +0.3% qtr). The resulting output gap is more negative in the near term than forecast in May, despite the positive growth surprise in Q1.

• While the impact of uncertainty about the impact of global conditions is expected to be a little less persistent than previously assumed, this is still expected to be a drag on business investment and household spending.
• Some members expressed concern with the speed of monetary policy transmission, with the record noting that: “Some members also drew attention to slow growth in parts of the economy that are most sensitive to interest rates. Residential construction, house prices, and retail activity have not materially recovered, despite monetary easing to date”.
• The RBNZ significantly revised down its forecast for house price inflation and noted that: “Ongoing weakness in the housing market is contributing to subdued residential construction and household consumption.”

• Recent weakness in the labour market also appears to have been factored in: “The Committee discussed constraints on household wealth and discretionary income. Employment and hours worked have declined, and wage inflation has slowed sharply over the last year.”
• The RBNZ acknowledged the support provided by high export commodity prices: “High commodity export prices are supporting activity in the agricultural sector, resulting in stronger spending in rural areas. However, to date, many agricultural businesses have used higher export revenues to pay down debt, limiting the passthrough to consumption and investment.”
• Regarding inflation, the record notes: “On a quarterly basis, non-tradables inflation excluding central and local government charges is consistent with inflation at or below the target mid-point. Some members suggested that this may represent a downside risk to medium-term inflation.”
• With respect to the global environment, the RBNZ notes that: “Some members emphasised the fact that some measures of uncertainty have improved considerably since May and noted a possibility that the domestic economy recovers more rapidly as the effects of uncertainty dissipate. Other members highlighted that excess supply in China and some parts of emerging Asia has the potential to lower tradable inflation in New Zealand over the medium term.”
• The risk distribution around the baseline forecast is viewed as balanced: “Some members considered the balance of risk [to the OCR] to be to the upside relative to the projected path, while others considered the balance of risk to be to the downside.”

Westpac’s view on the policy outlook.

The RBNZ seems set on taking the OCR significantly lower and the bar for a pause in the meetings before Christmas seems high. The RBNZ would have expected that presenting such a low OCR forward track would lead markets to conclude cuts in October and November were likely, and we certainly take on board that message.

This is an occasion where the data doesn’t really tell the story. What we have here is a change in strategy where the RBNZ is choosing to look through the CPI inflation outlook for the next six months and instead take action to underwrite an improvement in growth. The RBNZ likely won’t move away from this insurance strategy until totally comfortable that the economy is on track to grow at rates that will eliminate the current spare capacity.

The story seems to be one where there are concerns that the output gap will be much more negative in the second half of 2025 and take longer to close. This is being driven by a combination of economic uncertainty (mentions of uncertainty have not declined in the August Statement relative to May) and, in the eyes of some MPC members, the idea that interest rates are not having the leverage expected. The weaker housing market profile is part of that picture.

We likely won’t see evidence of any decisive bounce in growth towards trend in the Q2 GDP data, which is due in September – although we expect to see a bounce in some of the more sentiment driven-indicators (business confidence, PMIs, perhaps the housing market) in the next few months.

Our forecasts for CPI inflation are notably higher than the RBNZ’s for the next six months. We see the September quarter CPI at 1.1% vs the RBNZ’s 0.9%, and we expect inflation over calendar 2025 will print at 3.1% vs the RBNZ’s forecast for 2.7%. But the RBNZ doesn’t seem to be very focused on that. Some MPC members advocating a less dovish approach noted risks to inflation expectations. But while we will see little information on that before October, there will be more in November. We think this is a big risk to the MPC’s strategy and could be relevant for the November Statement.

We noted in our recent Hawks and Doves note that historically the OCR has moved 50-125bp below neutral in a non-crisis cycle. The OCR at 2.5% would bring the OCR into that range based on the RBNZ’s estimates (these still range between 2.9-3.5%). Policy will be clearly stimulative on our own estimate of a 3.75% neutral OCR.

It’s prudent to assume a 25bp cut in October. Another cut in November also seems more likely than not. But there is a lot more water to go under the bridge between now and November. The RBNZ has clearly signalled they will be data dependent.

Key data and events before the RBNZ’s October meeting.

Looking ahead to the RBNZ’s next policy review on 8 October, the key domestic data and events will be:

• The August Selected Price Indexes (16 September): This will provide further insight regarding the likely outcome of the Q3 CPI report, which will not be released until 20 October. • The Q2 GDP report (18 September): The outcome of this report will be compared to the RBNZ’s estimate, with any deviation having implications for the RBNZ’s estimate of the output gap and perhaps also its view on near-term growth momentum.
• The Q3 QSBO survey (7 October): The focus in this report will be on indicators of Q3 activity, capacity use and direct measures of cost/selling price pressures.

In addition to the above, key monthly activity indicators such as the BusinessNZ manufacturing and services indexes (mid-September) and the ANZ business and consumer confidence surveys (late August and late September) will also be of interest, as will the monthly retail spending and housing market reports (mid- September). Indicators relating to the labour market will likely be tracked especially closely. Should it occur, a lift in filled jobs and job advertising would provide some reassurance that the recovery is becoming selfsustaining. Inflation expectations measures from the ANZ’s business and consumer surveys will also be monitored see whether their recent lift has endured.

Outside of New Zealand, interest will clearly centre on any clarity that emerges regarding the final form of US tariff policy and its implications for growth in New Zealand’s major trading partners, the outlook for key export commodity prices and the prices of goods imported into New Zealand. Decisions taken by the US Federal Reserve will also be of importance to the extent that they impact financial conditions in New Zealand, including the behaviour of the exchange rate.

Finally, it is also worth noting that there will likely be a new external member of the MPC in place at the October OCR review (replacing Professor Bob Buckle, whose term ended with the August meeting). It is also possible that we may have a new RBNZ Governor in place, although it seems more likely that this will happen between the October and November meetings. New personnel with potentially different perspectives and judgments mean that the policy outlook could shift even if the data flow falls in line with the projections in the August MPS.

Key Highlights

• Gold corrected gains after it failed to clear the $3,400 resistance.
• A major bearish trend line is forming with resistance at $3,345 on the 4-hour chart.
• WTI Crude Oil prices declined below the $63.20 support zone.
• EUR/USD is consolidating above the 1.1600 support zone.

Gold Price Technical Analysis

Gold prices failed to settle above $3,400 and corrected gains against the US Dollar. It declined below the $3,375 and $3,360 support levels.

The 4-hour chart of XAU/USD indicates that the price settled below the $3,350 level, the 100 Simple Moving Average (red, 4 hours), and the 200 Simple Moving Average (green, 4 hours). There was a move below the 50% Fib retracement level of the upward move from the $3,268 swing low to the $3,408 high.

On the downside, initial support is near the $3,320 level. It is close to the 61.8% Fib retracement level of the upward move from the $3,268 swing low to the $3,408 high.

The first key support is $3,310. The next major support is near the $3,300 level. A downside break below $3,300 might call for more downsides. The next key zone to watch could be $3,280.

On the upside, immediate resistance is near the $3,345 level. There is also a major bearish trend line forming with resistance at $3,345 on the same chart. The next major resistance sits near the $3,355 level.

A clear move above $3,355 could open the doors for more upside. In the stated case, the bulls could aim for a move toward $3,400, above which the price could rally toward the milestone level of $3,450.

Looking at WTI Crude Oil, the price shows many bearish signs and could decline further below the $62.00 support zone.

Economic Releases to Watch Today

• Fed's Waller speech.
• FOMC Minutes.
• Fed's Bostic speech.

RBNZ delivered a 25bps cut to the Official Cash Rate, lowering it to 3.00% as widely expected. A more sizeable 50bps rate cut was discussed during the meeting. Policymakers maintained an easing bias, noting that “if medium-term inflation pressures continue to ease as expected, there is scope to lower the OCR further.”

The new projections point to the OCR dropping to 2.7% by Q4 2025, then settling between 2.5% and 2.6% in 2026 before edging back toward 2.7–2.8% in 2027. This outlook effectively signals room for one additional cut this year and another in early 2026.

The Bank highlighted ongoing slack in the economy and easing domestic inflation, projecting headline inflation to return to the 2% midpoint of target by mid-2026. However, New Zealand’s recovery has stalled, with household and business spending constrained by global policy uncertainty, weaker employment, higher costs for essentials, and falling house prices.

Full RBNZ statement and MPS.

NZD/USD dives through 0.5855 support after the announcement to resume the decline from 0.6119. Next target is 50% retracement of 0.5484 to 0.6119 at 0.5802. As the decline is currently seen as a corrective move, there might be some support form 0.5802 to bring rebound. However, firm break of 0.5906 support turned resistance is needed to indicate short term bottoming. Otherwise, risk will stay on the downside in case of recovery.

Also, decisive break of 0.5802, coupled with downside acceleration through the near term falling channel, will suggest that NZD/USD is indeed reversing the whole rise from 0.5484. That could pave the way through 61.8% retracement of 0.5727 to wards 0.5484 low.

Media release

Annual consumers price index inflation is currently around the top of the Monetary Policy Committee’s 1 to 3 percent target band. However, with spare capacity in the economy and declining domestic inflation pressure, headline inflation is expected to return to around the 2 percent target midpoint by mid-2026.

New Zealand’s economic recovery stalled in the second quarter of this year. Spending by households and businesses has been constrained by global economic policy uncertainty, falling employment, higher prices for some essentials, and declining house prices.

There are upside and downside risks to the economic outlook. Cautious behaviour by households and businesses could further dampen economic growth. Alternatively, the economic recovery could accelerate as the full effects of interest rate reductions flow through the economy.

The Monetary Policy Committee today voted to decrease the Official Cash Rate (OCR) by 25 basis points to 3 percent. Further data on the speed of New Zealand’s economic recovery will influence the future path of the OCR. If medium-term inflation pressures continue to ease as expected, there is scope to lower the OCR further.

Summary record of meeting – August 2025

Annual consumers price index inflation remains within the Monetary Policy Committee’s 1 to 3 percent target band. Recent increases in food prices and administered prices have contributed to near-term inflationary pressure. However, domestic activity has been subdued and there remains significant spare productive capacity in the economy. Headline inflation is expected to return to around the 2 percent target mid-point by mid-2026. If medium-term inflation pressures continue to ease as expected, there is scope to lower the OCR further.

Annual CPI inflation remains within the target band

Annual consumers price index (CPI) inflation increased to 2.7 percent in the June 2025 quarter. Headline inflation is expected to reach to 3.0 percent in the September 2025 quarter, reflecting large increases in administered prices, food prices, and the prices of other tradable goods and services.

Surveyed measures of medium-term inflation expectations remain near 2 percent, consistent with the mid-point of the target band. Non-tradables inflation has continued to decline in aggregate. Measures of core inflation have declined and are within the target band. Headline inflation is expected to converge to the mid-point of the target range over the next year as tradables inflation pressures dissipate and significant spare capacity continues to reduce domestic price pressures.

Near-term inflation expectations have increased, particularly for households. Household inflation expectations have risen across several advanced economies and may be influenced by global factors such as increased trade restrictions, as well as relatively large increases in some prices such as those for food and energy.

Tariffs and economic policy uncertainty are dampening the global economic outlook

Evidence to date suggests that the global economy is responding broadly as expected to trade restrictions and policy uncertainty. Growth in some of our trading partners, particularly China, was higher than expected in the second quarter of 2025 but is expected to moderate in the coming quarters. Headline inflation has increased moderately in some advanced economies but is declining in most of our Asian trading partners.

Tariffs are causing changes to global trading patterns but have so far had a limited effect on aggregate global trade volumes. To date, there is no evidence of major disruption to global supply chains, or a material impact on the prices of New Zealand’s imports or exports. The Committee noted that it continues to expect that the increase in global trade restrictions will result in less inflationary pressure in the New Zealand economy.

The effective tariff rate on New Zealand exports to the United States is higher than anticipated at the time of the May Statement. Some firms and industries may experience more challenging export conditions as a result. The medium-term implications for New Zealand will depend on how global demand responds to increased trade restrictions and economic policy uncertainty.

Economic growth in New Zealand is expected to recover gradually

High-frequency indicators suggest that the New Zealand economy contracted in the second quarter of 2025 and was weaker than expected at the time of the May Statement. Growth is expected to resume in the September quarter, consistent with a recovery in some economic indicators for July. A key judgement for the Committee’s economic assessment was the extent to which spare capacity in the New Zealand economy is likely to persist.

The Committee discussed constraints on household wealth and discretionary income. Employment and hours worked have declined, and wage inflation has slowed sharply over the last year. Household dissaving since the start of 2022 has reduced savings buffers. At the same time, inflation in some essential expenditure components such as food, gas, electricity, and council rates has been much higher than the general rate of inflation. These factors were noted as likely to contribute to a slower recovery in domestic spending than would otherwise be the case.

House prices have declined to a level within the Reserve Bank’s range of sustainable house price estimates. Housing is a key component of household wealth, which influences household spending. Ongoing weakness in the housing market is contributing to subdued residential construction and household consumption.

The Committee discussed the fiscal outlook. Declining government spending as a share of the economy is expected to reduce inflationary pressure in the medium term. This is consistent with the economic and fiscal projections published in the Budget Economic and Fiscal Update 2025.

The Committee acknowledged regional and sectoral divergences in economic activity. House price growth has varied considerably across regions. High commodity export prices are supporting activity in the agricultural sector, resulting in stronger spending in rural areas. However, to date, many agricultural businesses have used higher export revenues to pay down debt, limiting the pass-through to consumption and investment.

There is significant spare capacity in the New Zealand economy

A broad range of indicators suggest that significant spare capacity in the New Zealand economy persists. Unemployment has increased, as have measures of labour underutilisation, and firms are reporting that it is relatively easy to find labour. Firms are also reporting low levels of capacity utilisation. The Committee noted that while credit is generally available, growth in business lending has been slow.

The Committee discussed slow growth in the productive capacity of New Zealand’s economy. Potential output growth has slowed, reflecting subdued investment, low productivity growth, and historically low population growth through net immigration. The Committee noted that appropriate monetary policy settings would support sustainable long-run investment and growth.

Monetary policy continues to transmit through the financial system

The Committee noted that wholesale interest rates have fallen since the May Statement, resulting in lower mortgage and term deposit rates, particularly at shorter terms. The average interest rate on the stock of mortgages is expected to continue to decline over the coming year, as about half of existing mortgages are expected to re-fix onto lower rates over the next six months. This will reduce debt servicing costs for households as past reductions in the OCR continue to transmit through the financial system.

Long-term bond yields have increased internationally over the first half of the year, with higher term premia reflecting geoeconomic uncertainty and elevated debt levels. Despite subdued domestic activity, the New Zealand dollar TWI has been relatively stable through this period, in part due to policy developments and declining short-term interest rate expectations in the United States. Equity prices in the United States have been elevated, but this has largely been attributable to the out-performance of a few large technology firms.

The financial system remains stable

The Committee was briefed on financial system stability. Subdued demand and low profitability are contributing to financial stress for some businesses. Non-performing loans for households and businesses have increased but remain low relative to previous cycle peaks. Increased provisions and strong capital buffers mean that banks are well-prepared to absorb any losses. The Committee noted that monetary policy settings that support growth in the economy will also contribute to financial stability.

There are upside and downside risks to the economic outlook

The Committee expects headline inflation to remain within the target band over the forecast horizon. However, with inflation projected to increase to 3.0 percent in the September quarter, there is a material possibility that it rises above the target band. The period in which this is most likely to occur is too soon for monetary policy to have any meaningful effect. However, if inflation were to remain higher for longer than expected, there is a risk that this influences inflation expectations and wage- and price-setting behaviour over the medium term.

The Committee noted that increases in administered prices, such as local council rates and some energy charges, have contributed to higher-than-otherwise non-tradables inflation. Some members emphasised that these prices represent rising costs for businesses and may spill over to generalised non-tradables inflation, particularly in the near term. Other members emphasised spare capacity and weak demand, which would limit the ability of firms to pass on cost pressures to consumers.

Some members also drew attention to slow growth in parts of the economy that are most sensitive to interest rates. Residential construction, house prices, and retail activity have not materially recovered, despite monetary easing to date. On a quarterly basis, non-tradables inflation excluding central and local government charges is consistent with inflation at or below the target mid-point. Some members suggested that this may represent a downside risk to medium-term inflation. Other members emphasised that previous reductions in the OCR continue to transmit through the financial system and will take time to have their full effect on activity and inflation. Growth in interest-rate-sensitive sectors of the economy is projected to recover over the remainder of this year.

The Committee discussed the extent to which uncertainty associated with global trade restrictions is likely to limit domestic demand and inflationary pressure in the medium term. Consumption and investment demand appear to have weakened in the second quarter of 2025, partly in response to heightened trade policy uncertainty. The effects of uncertainty on domestic activity are assumed to persist over the remainder of the year. Some members emphasised the fact that some measures of uncertainty have improved considerably since May and noted a possibility that the domestic economy recovers more rapidly as the effects of uncertainty dissipate. Other members highlighted that excess supply in China and some parts of emerging Asia has the potential to lower tradable inflation in New Zealand over the medium term.

Some members also emphasised the risk that precautionary behaviour by New Zealand households and businesses may result in a weaker consumption and investment outlook than assumed, particularly in the context of slow growth in household wealth and discretionary incomes and low firm profitability. In this environment, businesses that are uncertain about potential future demand are less willing to invest, which in turn lowers potential growth and could further prolong uncertainty about future incomes and wealth. It is possible that pessimistic sentiment, together with the initial negative effects of the global tariff shock, have dampened the effects of the reduction in the OCR since last August.

The Committee noted limits to the ability of monetary policy to influence expectations of long-term growth. Some members emphasised that near-term support from monetary policy is most effective when combined with regulatory and policy settings that promote innovation and investment to support productivity growth.

The Committee voted to reduce the OCR to 3 percent

The projected path of the OCR reflects the Committee’s central expectation of the path needed to ensure that inflation settles sustainably near the target mid-point. Uncertainty about the future path of the OCR is reflected in the Committee’s discussion of upside and downside risks to the outlook. Some members considered the balance of risk to be to the upside relative to the projected path, while others considered the balance of risk to be to the downside.

The Committee discussed three policy options: keeping the OCR on hold at 3.25 percent; cutting the OCR by 25 basis points to 3 percent; or cutting by 50 basis points to 2.75 percent.

The case for holding the OCR steady at 3.25 percent focused on positive influences on growth. Global economic activity outside of the United States has so far proven resilient in the face of new trade barriers, and global policy uncertainty has reduced from its peaks in April and May. The full extent of recent monetary easing is yet to fully transmit through the economy. Although high-frequency indicators suggest weak economic activity in the June 2025 quarter, available indicators for July suggest some improvement. With inflation approaching the top of the target band, and near-term inflation expectations rising, it could be prudent to pause to observe incoming data. One member gave relatively more weight to this view.

The case for lowering the OCR by 50 basis points to 2.75 percent emphasised declining inflationary pressure and significant spare capacity. Some members put relatively more weight on the risk that the negative consequences of global policy uncertainty on domestic consumption and investment are self-reinforcing and therefore more persistent. A larger reduction in the OCR might disrupt such a dynamic and generate clearer signals that support consumption and investment, whereas a gradual reduction in the OCR might not provide the same positive signalling effect. These members also emphasised that weakness in the labour market and excess capacity limits the upside risk to inflation should the economy recover more quickly than projected.

The case for lowering the OCR by 25 basis points to 3 percent was based on the upside and downside risks around the central projection being broadly balanced. Financial conditions are continuing to respond to past reductions in the OCR. They are also influenced by expectations of the future path of the OCR, which provides sufficient signalling effects. If medium-term inflation pressures continue to ease in line with the Committee’s central projection, the Committee expects to lower the OCR further. Reducing the OCR by 25 basis points at this meeting provides the opportunity to adjust this view incrementally in response to new information.

On Wednesday 20 August, the Committee voted on the options of either reducing the OCR by 25 basis points or reducing the OCR by 50 basis points. By a majority of 4 votes to 2, the Committee agreed to decrease the OCR by 25 basis points to 3 percent.

Attendees:
MPC members: Christian Hawkesby (Chair), Bob Buckle, Paul Conway, Prasanna Gai, Carl Hansen, Karen Silk
Treasury Observer: James Beard
MPC Secretary: Evelyn Truong