We’re Labouring Under The Weight Of Expectations

• The war in the Middle East is keeping us in suspense. The negotiations appear to be back on between Iran and the US. We expect to see a lot more back-and-forth on that front. The price of Brent Crude is fluctuating at speed – trying to keep up with headlines. The S&P 500 and Nasdaq hit record highs, the US market is booming.
• Domestically, the NZX50 saw an upward swing last week too. Governor Brenman’s speech in Hamilton on Wednesday was read as dovish, and wholesale interest rates have come down slightly, but still pricing in a full hike in July.
• Labour market data out this Wednesday, but any up or down-side surprises won’t spook us or the RBNZ. The true impact of the war will be in how businesses fare. And they’re cutting back, not hiring new staff, not expanding their operations. We will feel the consequences of this contraction in 6 to 12 months – and that’s the horizon the RBNZ should be looking at too.

Here’s our take on current events 

Oil prices have been up and down and up again. Last week, the price of brent crude reached a high for the year, of $126USD. The spike was short-lived, and the oil price fell back down on news that Iran had delivered a peace deal to the US through Pakistan. That brought crude prices down, we are sitting at $108USD per barrel this morning – and we expect more fluctuations.

The S&P 500 and Nasdaq hit record highs despite the war and uncertainty – the US economy is weathering the crisis well, decreasing the chance that Trump will pull out of the war any time soon. The VIX index, still subdued – back down to pre-war levels believe it or not! It’s like nothing is happening.

Domestically, wholesale interest rates have fallen back over the week - pricing in one 25bps rate hike in July, and 86bps by December. Pricing is still too aggressive, but moving in the right direction. We see the need for no rate hikes. And even the most aggressive economics team is calling for 75bps (not 86). The two-year swap rate has also started coming down since Wednesday. Interest rates fell off the back of Governor Brenman’s speech in Hamilton on Wednesday, which the market read as slightly dovish.

This week, we have labour market data for the first quarter on Wednesday. We aren’t expecting big moves in the unemployment rate, we expect it to stay between 5.3%-5.4%. On the day, upside or downside surprises won’t change the story much for us. We need time to assess the damage, and that’s why we’re in the no-hike camp.

Chart of the Week: Plenty of capacity, low wage inflation, and many scars to come

• The Kiwi economy is turning an awkward new leaf. Soft demand and higher than expected inflation is keeping us on our toes. The labour market data out next week will give us another vantage point. We ended 2025 with hope. Some of that momentum will carry into the March 2026 quarter.
• There were growing signs that appetite for labour was improving in 2025. But we are still left with sizeable spare capacity in the labour market. Wage growth has a cost-of-living crisis to keep up with, and we aren’t optimistic that we will reach it any time soon.
• It’s a slow burn, and the war in the Middle East is eating away at some of the fuel we needed. But it won’t show up in this round of data. Labour market tightening takes time, and requires business sentiment to stabilise and improve.

The first look at 2026 data has revealed that the Kiwi economy is in an awkward position. And that was before the War in the Middle East. Inflation remains uncomfortably above the RBNZ’s target band, but demand is being destroyed. Business confidence has taken a sharp fall, and Kiwi spending on non-essentials is down. This puts a spotlight on the labour market. We need to assess what was really happening at the start of the year, and how far into a recovery we were when the crisis hit. And then, in time, we need to assess the damage of the conflict on demand.

If the final months of 2025 are anything to go by, we expect some solid momentum in the latest labour market data. It’s too early, in the three months to March, to see any impact from the war. So it’s more about finding our starting point, rather than assessing the current state. The economy has moved into a far darker place. And we expect to see a softening in the labour market from the June quarter onwards. And only economists would dedicate so much time and analysis to data that is already dated before it’s even published. But it is worthy of some time.

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