New Zealand jobless rate hits 11-year peak days before vote

The numbers and the timing

New Zealand's unemployment rate ticked up to 5.7% in the third quarter from 5.6% three months earlier, confounding forecasts for 5.5% and marking the highest reading since Q3 2015.

The release landed three days before the Nov. 7 election. Payrolls shrank 0.1% on the quarter, against a projected 0.4% increase. Over the 12 months through September, the economy added 20,000 jobs, lifting employment 0.7% year over year, which was less than half the pace economists expected.

Markets and the rate path

The New Zealand dollar slipped after the report, while the yield on two year, policy sensitive notes fell seven basis points to 3.87%. Swaps now imply the chance of a December hike is less than 50 50, down from roughly 75% on Tuesday, based on Bloomberg compiled data.

The figures suggest the labor market has slack, which is restraining inflation and forcing a reassessment of how many additional moves the Reserve Bank needs to make to tighten. Combined with rising oil prices and the imminent Nov. 7 election, business confidence has softened, curbing new hiring.

Policy, politics and pay

Last month, the Reserve Bank kept the Official Cash Rate at 2.75% after a 4 3 split on the Monetary Policy Committee. Officials still judge there is little room for inflation pressures to become embedded, given that underlying demand is weak. Governor Anna Breman, who backed leaving the OCR unchanged, subsequently remarked that the odds of a December rate hike are high.

In Auckland, Westpac senior economist Michael Gordon said, "The ongoing rise in unemployment points to more slack in the labor market than the RBNZ was hoping to see in an economy that has been growing for over a year now." He added, "The doves on the policy committee will be encouraged in their view that there is limited scope for headline inflation shocks to pass through into second-round effects."

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Pay gains are still muted, in line with the central bank's projections. For non-government employees, ordinary-time earnings increased 2% year over year, slowing from a 2.1% rate in the second quarter.

The political setup and what it means for investors

The ruling National Party has run on a platform of superior economic management, yet it has lagged in surveys and may still fall short of a parliamentary majority even with its two current partners. Labour, the main opposition, might assemble a government with up to three additional parties, and it aims to include employment as a goal alongside price stability in the RBNZ's mandate.

The bottom line: softer hiring, subdued wages, and election uncertainty pushed markets to trim the near term tightening odds, though December remains in play. Rate sensitive corners of New Zealand markets will likely trade off incoming growth and inflation data, plus post election coalition arithmetic.

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