New Zealand Dollar Treads Water after Second-quarter Employment and Wage Data Fail to Inspire

- NZD treads water after unemployment data fails to inspire market.

- Employment growth robust but minimum wage hike flatters wage data.

- ANZ Business Confidence index registers sixth consecutive decline.

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The New Zealand Dollar weakened into the London session Wednesday after a mixed second-quarter labour market report failed to provide the Kiwi currency with inspiration for another move higher.

Employment in New Zealand's economy grew by 0.5% during the three months to the end of June which, although down from 0.6% at the start of the year, was ahead of the consensus for growth of just 0.4%.

However, and on the downside, the unemployment rate rose by 10 basis points to 4.5% when markets had looked for it to hold steady at 4.4%. This was attributed to an increase in the participation rate, which artificially increases the number of individuals who are classified as unemployed. 

"The Jun qtr employment report underwhelmed and the market's focus quickly switched to Trump and tariff headlines, although deep in the weeds there is good news. The +0.5%/q lift in jobs (80% were full-time) was a fraction higher than expected, and the participation rate hovers near record highs at 70.9%," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities. 

Most importantly, the labour cost index rose by 0.6%, which is up from the 0.3% seen in the first quarter and in line with market expectations. Meagre levels of wage growth have weighed heavily on domestic inflation, Kiwi interest rates and the Dollar during recent times so the pay data is arguably the most important aspect of the labour report. 

"We expected the 4.8% jump in minimum wages to complement wage rises elsewhere, but there were stagnant wages for some public servants (teachers, nurses and tax officers) due to not agreeing on terms and conditions. So we expect a rebound if a deal is secured," Beacher addds. 

Some in the market had been optimistic in their outlook for the labour report and Kiwi Dollar in its aftermath, given the implementation of a near 5% increase to the minimum wage in April, which Statistics New Zealand says was responsible for around 0.2% of the second quarter increase in pay. 

The minimum wage is set to rise from $15.75 per hour last year to $20 per hour in 2020, which will flatter average wage growth numbers each year. However, once this increase is taken away from the numbers, the latest data show that organic pay pressures are still meagre at best in New Zealand. 

"The labour market figures are perhaps best seen as a corrective to the pessimism seen in recent business confidence surveys. Growth in activity has slowed from its peak, but businesses have remained open to hiring. And while wage growth has picked up, it’s not spiralling higher in the way that businesses seem to fear," says Michael Gordon, an economist at Westpac. 

Markets care about the labour and wage data because it has a direct bearing on inflation, which is itself highly pertinent to questions around interest rates.

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

Above: NZD/USD rate shown at daily intervals.

The NZD/USD rate was quoted 0.08% lower at 0.6794 during the morning session Wednesday while the Pound-to-New-Zealand-Dollar rate was 0.04% higher at 1.9294.

Above: Pound-to-New-Zealand-Dollar rate shown at daily intervals.

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Kiwi Business Confidence Scores 6th Consecutive Slump

The Australia & New Zealand Banking Group (ANZ) Business Confidence index marked its sixth consecutive monthly decline Tuesday when it fell to -44.9 for July, down from -39.0 in June. 

This means the index has fallen in every month that a survey was published this year, with the barometer first reported for 2018 in February, at -19, up from the -37.8 seen back in December. 

"Firms’ perceptions of their own prospects are a better gauge of economic outcomes, but the news wasn’t upbeat here either: it dropped 5 points to a net 4% expecting an improvement. This is the lowest reading since May 2009 and well below the long-term average of +27," says Sharon Zollner, chief economist at Australia & New Zealand Banking Group. "By industry, retailers remain the least positive about their own activity (-4%) despite still-robust consumer confidence."

ANZ's business confidence survey asks around 1,500 companies from the manufacturing, building, retailing, agricultural and service industries to rate their own outlook for a 12 month period, as well as their own outlook relative to their perceptions of how others are doing. The responses are combined to produce an index. 

One likely reason behind the slump in business confidence, which appears to have been led by retailers, could be the Labour-led coalition government having implemented the first of several anticipated increases to the minimum wage in April, taking it from $15.75 per hour to $16.50.

Government policy means the minimum wage is set to rise from $15.75 per hour last year to $20 per hour in 2020, which will impact all low-wage paying companies but particularly retailers, given the extent to which they are normally reliant on cheap labour. 

Markets care about business confidence data because companies respond quickly to changes in economic conditions so a rise or fall in confidence can provide investors and traders with an early steer on the likely pace of economic activity during a given period.

ANZ's "composite GDP growth indicator" combines insight from business confidence data with that gleaned from similar surveys of consumers. The indicator still points to growth in the Kiwi economy, according to Zollner, although only because of resilient levels of consumer and household confidence. 

"This economy feels increasingly late in the cycle. Fiscal stimulus and the stillstrong terms of trade will support growth. However, sustained low business confidence increases the risk that firms will delay investment and hiring decisions, in what could become something of a self-fulfilling prophecy," Zollner writes, in a note to clients on Tuesday. 

RBNZ Weighs on the Kiwi Dollar

Markets care about overall activity and demand within an economy because it has a direct bearing on inflation, which is itself highly pertinent to questions around interest rates. Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators. 

The Reserve Bank of New Zealand has held its interest rate at a record low of 1.75% ever since the end of 2016, citing below-target inflation, weak wage growth and a challenging outlook for the economy. Consensus is for the central bank to keep rates here until some time in the second-half of 2019.

Kiwi inflation has remained below the midpoint of the 1% to 3% target ever since 2012, aided by the combined effects of weak wage growth and high household debt levels, which have crimped the extent to which consumers have been able to raise their spending.

This, at a time when central banks in the US, Canada, UK and elsewhere are raising their own interest rates, has incentivised investors to sell the Kiwi Dollar in favour of buying Pounds, US Dollars and other currencies.

As a result, New Zealand's Dollar has lost 5.19% against the US Dollar in 2018 and 2.99% against Pound Sterling, although it has fallen further than that in recent months, because it had risen by similar measures during the first quarter of the year.

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