BusinessNZ reported that New Zealand’s Performance of Services Index (PSI) fell to 47.5 in May, down from 48.9 previously. The reading remains below the 50 threshold that separates expansion from contraction, pointing to ongoing weakness in services activity.
Continuous Contraction In Key Economic Sectors
The decline in the services index to 47.5 shows that a key part of the New Zealand economy is contracting at a faster pace. This is the fourth consecutive month the index has been below the 50-point mark that separates contraction from growth. We see this as a clear signal that the Reserve Bank of New Zealand (RBNZ) will be forced to consider cutting interest rates sooner than the market expects.
This weak services data follows last month’s manufacturing PMI, which also remained in contraction at 48.8. With both major sectors struggling and recent Statistics NZ data showing unemployment ticking up to 4.4%, the case for maintaining high interest rates is weakening. We expect these figures will pressure the RBNZ to shift its focus from fighting inflation to stimulating growth.
Market Positioning And Impact On The NZD
In the coming weeks, we will be positioning for a weaker New Zealand dollar. We are considering buying put options on the NZD/USD pair, as interest rate cut expectations typically devalue a currency. The swaps market has already moved to price in a 55% chance of a rate cut by the RBNZ’s September meeting, up from 20% just two weeks ago.
We are also anticipating lower bond yields as the market digests this slowdown. This means we will look at interest rate swap positions that benefit from falling rates or consider futures on New Zealand government bonds. Historically, a services index reading below 48 has often preceded a 50 basis point drop in the 2-year government bond yield over the following quarter.
