We’re officially one month away from the end of the 90-day pause on reciprocal tariffs. And so far, we’ve had one deal. One. It’s with the UK, and it’s with loose ends. We would have expected many more by now. And still hope for many more to come between now and July 9th. But if the current track record is anything to go by, it’s painfully slow. We remain in limbo. And President Donald Trump’s attention seems to be elsewhere, with his very public breakup with Elon Musk.

Beyond the playground drama, the US economy is starting to pay the price of the tariff turmoil environment. We’ve been waiting and watching, trying to gauge the tariff impacts. And it feels like we’re in the eye of the storm.

We know, mostly anecdotally, that there has been a lot of front-loading. Car sales for example, surged in March, only to fall off a cliff in April. And we’ve seen a further pullback in Chinese sourced goods over the month of May.

The front loading of activity, and growth, is common sense. We saw similar reactions when GST was introduced. If you know a tax hike (GST or tariff) is coming, you buy now, not after. The inflation gauge spikes, temporarily, and then returns to levels seen before the tax hike. So, what we saw in the first half of the year, was a confused front loading. And what we’ll see over the second half, is an unwind. In fact, we’re possibly already seeing that unwind now.

Monthly trade data out of the US last week showed signs that the recent front loading of imports into the US may be coming to an end. The US trade deficit over April narrowed 55.5% - the most on record- led by a record 16.3% decline in imports. And the value of US imports from China fell to its lowest level since the early months of pandemic when borders were physically shut.

Nevertheless, as economists, it’s difficult to strip out the likely front loading from the actual trend growth beneath. And it’s equally difficult to strip out the unwind. So, growth may be rosy for now, and bleak a little later.

So, what do you do? Well, we turn to sentiment indicators. And there has been a shock to sentiment, as you’d expect given all the uncertainty.

Last week we saw a fall across US PMI surveys indicating a contraction in activity. See our Chart of the Week for more, but essentially the surveys can be summed up simply as firms are facing weaker activity but persistent inflation pressures. That’s painful.

Everything that happens in an economy washes out in the labour market. If we’re growing, businesses hire. If we’re stalling, businesses retrench. The US payrolls report is the “glamour stat”. The red carpet gets rolled out on the first Friday of every month, and camera crews fight for a glimpse into the labour market. Well last month’s report was released on Friday, and the labour market is bending, not breaking. Payrolls have softened but not dramatically, with 139k for month of May (with consensus 120k). The unemployment rate was unchanged at 4.2%, while the level of underemployment held steady. That’s good. And wages posted a solid gain of 3.9%. Again, that’s good. But we’re sitting here knowing it’s still way too early to see the full impacts of the tariffs. And there are some questions around the strength of the payrolls report, with the ADP (a pre-payrolls payrolls report) declining noticeably this year, to just 37k last month. Conditions have weakened… but we’re in the eye of the storm. We felt some tailwinds to start, with pre-loading, and face headwinds ahead, as the full force of the tariffs come through.

This week we get the US inflation report for May. We haven’t seen impact of tariffs in the data yet. But we’re watching. US surveys show higher, or elevated, inflation is expected, but it is not yet in the hard data.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, curve steepness remains supported at elevated levels

“Weaker US data (ISM and Employment data) has seen the 2–5-year yields come off recent highs. The 10-year part of the curve continues to be elevated as risk premium is priced given bulging global debt needs e.g. US and Japan. That should continue to support curve steepness which is already at reasonably elevated levels. NZ yields are following the global moves given the lack of heavy hitting data. This week's Q1 GDP partials and Manufacturing PMI sideshows to next week's PMI release. Paul Conway speaks this morning on RNZ which may have some bearing given the dovish track and hawkish talk from 2 weeks ago.

NZ markets have taken the lead from offshore central bank with the cut/pause operating model. There are currently -7bp of cuts priced into July and -20bp by August. A total of -33bp is priced by the end of 2025 while the RBNZ sit at -40bp of cuts, not miles apart. The economic community maintains a biased towards -50bp of further cuts. A high mortgage refix period is not creating imbalance in the market yet, the interest rate swap market feeling more balanced post the RBNZ position flush out.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, big topside resistance comes into focus

“As the dust settled after the May RBNZ MPS, last week the NZ Dollar for the most part took its cues from offshore rate expectations, which painted a mixed picture last week. In a slight recalibration of NZD OIS pricing, investors now see a terminal OCR of 2.92% by Christmas—a touch higher and earlier than the RBNZ’s own 2.85% forecast by February 2026. With only Q1 NZ GDP and some minor high-frequency data before July’s MPR, the market has largely priced out any chance of a mid-winter move to 3%, reflecting the more neutral tone from RBNZ officials.

While the pricing out of short-term expectations of rate cuts below 2.75% has provided support for the Kiwi, the major drivers of price action remain offshore. The growth vs. inflation debate shifted last week, as US ADP and Jobless Claims data initially pointed to softening employment picture in the US—raising expectations that the Fed could deliver two 25bp cuts later in 2025. After a period of "sell everything US", including the US Dollar, on concerns over the financing of twin deficits and inflation risks, a short-end rally in US rates drove a more classic USD selloff. By Thursday night, NZD/USD punched through the multi-month 0.6040 resistance area, reaching a weekly high of 0.6079, as traders lowered expectations ahead of Friday’s NFP print. However, the better-than-expected US jobs report saw the USD regain support, as Fed easing bets were pared back once more - a testament to the fluid and challenging macro backdrop amid US fiscal policy uncertainty.

This week, all eyes turn to inflation, with Wednesday’s US CPI print delivering the first full month of price data since the rollercoaster of tariff moves following April’s Liberation Day. With the US employment data likely failing to give the Fed enough confidence to cut rates, any signs of an inflation uptick could put the US bond curve to the test once more. Traditionally, this would weigh on the Kiwi as a stronger greenback emerges, but in a market where "uncertainty" is the new buzzword, historical price action norms no longer hold. A selloff in long-end US yields tied to inflation-linked risk aversion now appears to be accompanied by a weaker US Dollar. For NZD/USD, having cleared 0.6040—albeit briefly—attention now turns to key multi-year downtrend resistance at 0.6170, which is suddenly on the horizon.” Hamish Wilkinson, Senior Dealer - Financial Markets.

Weekly Calendar

• Domestically, the data front remains relatively quiet. We’ll see more GDP partial data, specifically the release of manufacturing activity data later today. Thereafter, an update on net migration, tourism and card spending is out later this week. We’ll be particularly interested to see whether net migration levels continue to pull below their long-run average range of around 30,000, after last month’s print saw annual net migration slow to ~26,000 seasonally adjusted.
• Taking the spotlight this week will be the US CPI release on Thursday. Headline inflation is expected to lift from 2.3% to 2.5% with another 0.2% monthly rise in prices. And while some tariff impacts are expected to be seen, a pull back in services inflation is expected to provide some offset to the monthly print.

See our Weekly Calendar for more.