We’re still twiddling our thumbs for trade deal announcements. But at the very least there were some positive developments over the last week. For starters, President Trump signed an executive order aimed at easing the impact of the 25% tariff on US auto imports. The tariff itself came into effect on Saturday, but the new order allows domestic car manufacturers to receive partial reimbursements for imported car parts. Trade tensions between the US and China also appear to be easing. Trump has shown willingness to lower levies on China “at some point”. On the other side of the table, China has said it is “evaluating” offers from the US to engage in trade negotiations. Although, reports have emerged that China has exempted around a quarter of US imports from the 125% tariff. A list of 131 US-made products reportedly eligible for exemption has been circulating among businesses over the past week. And though the list has not been officially confirmed, a number of companies in China have reported bringing in goods from the list without paying tariffs. China is far less reliant on US imports than the US on Chinese imports. Nonetheless, China’s quiet moves in the background suggest that they’re likely trying to mitigate trade war damage to their economy by avoiding a collapse in key imports. All in all, trade talks are still ongoing, but recent developments lean positive and progressive.

Globally, the impact of the tariffs is already coming through as high frequency data rolls in. In the US, the goods trade deficit widened from $147.9bn to $162bn in March with a surge in imports before tariffs were implemented. And the rush to bring in imports was largely responsible for US economy contracting an annualised 0.3% in the March quarter, the first fall in GDP since 2022. Looking ahead, activity likely slowed in April. Several US regional manufacturing surveys posted sharp drops in activity last month, alongside deteriorating expectations for the next six months (see the Chart of the Week for more).

Away from the US, China’s, manufacturing PMI also dropped to 49 over April - its lowest reading in 16 months. And the new export orders measure fell to the lowest since late 2022. While here at home, tariffs are also clouding the outlook for local businesses. The tariff trade war is weighing on business confidence and business’ plans to invest. The Kiwi economy was on the road to recovery pre-tariffs. But heightened global uncertainty threatens the path ahead with some firms likely needing to shelve their investment and employment plans.

Tariff news will continue to dominate headlines in the near-term. But locally, we’re waiting for the latest labour market data, out on Wednesday. The economy may have just started to turn, with output expanding at the end of last year. But the labour market lags the broader economic cycle and the appetite for labour remains soft. Jobs growth looks to have picked up the pace at the beginning of the year, but still not fast enough to outrun population growth. The labour market is struggling to absorb the added capacity. And so, by our calculations, the unemployment rate is set to hit the highest level since December 2016, rising from 5.1% to 5.3%.

Stats NZ’s monthly jobs data notched a 0.2% gain over the March quarter. It follows the steep decline in filled jobs over the middle of 2024, including eight months of a decline in the number of jobs. The low base is underscored by the weak annual rate, with March employment 1.5% below last year’s levels. There is a conceptual difference between Stats NZ’s filled jobs data and the Household Labour Force Survey (released on Wednesday). The former is drawn from tax data, and the latter is subject to sampling errors. Despite this, the monthly data does a good job in providing a steer on employment. Accordingly, we have pencilled in a modest 0.1% quarterly lift in employment following two straight quarters of a decline.

Growing slack within the labour market should also see wage growth continue to moderate. The private sector Labour Cost Index (LCI) hit a series high of 4.5% in early 2023, as rising inflation expectations and labour shortages bolstered wage demands. But balance of power has shifted back to the employers. We expect to see a 0.6% quarterly rise in wages, pulling down the annual rate from 2.9% to 2.7%.

The jobs data is a key statistic before the May MPS. Our forecasts are slightly softer than the RBNZ’s latest projections. The RBNZ sees the unemployment rate lifting to 5.2%, which they forecast to be the peak in the current cycle. However, given the weakening global growth outlook, there’s risk the recovery in labour demand is delayed.

Financial Markets

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

In rates, tariff headlines remain the big mover

“Last week was comparatively subdued in rates and markets generally. Globally, tariff headlines remain the big mover in markets, with positive developments out of US and China both seemingly pulling back from the brink giving a boost to risk sentiment. However, a string of weak US data last week ultimately saw Treasury yields drift lower over the week. Though over the weekend, US payrolls came in stronger than expected supporting the case for the Fed to leave rates on hold seeing yields spike higher.

A quiet week locally as well, the Kiwi curve ending the week about 5bps lower and mildly flatter. The results of the ANZ business confidence survey, the only big piece of data, indicated a marked softening over the course of this month but didn’t make much of a splash on release.

Looking ahead we have employment which is the last big piece of data before the May meeting. Markets still seem confident a 25bps cut is the most likely outcome. The short end has remained well anchored to a series of measured cuts and a terminal of around 2.70%. Suspect we will need to wait for the forecast OCR track from the RBNZ to see a shake up here.” Matthew Crowder, Balance Sheet Manager – Treasury

In currencies, some positivity returns for the US dollar

“In our last weekly FX commentary, we mentioned that the demise of US exceptionalism had been behind the sell off in the US dollar, rather than the US dollar declining in and of itself. Traders had simply been de risking their portfolios, unwinding some of their ‘long US market’ positions. Last week tariff angst was put more on the back burner, and the US dollar continued in its relief rally, after solid declines during the worst of the tariff storm. This saw the Kiwi back down from its lofty high of 0.6029 the week prior, and we traded between 0.5897-0.5980, but mostly around the 0.5935 level during Kiwi trading hours. The Kiwi appears to have now hit a top of 0.6029, and we are now settling back into a lower range. For exporters the key levels on the downside now are 0.5822 (the 38.2% Fibonacci retracement point), and from there if the trend continues down to 0.5693 (the 23.6% Fib). This is of course if we continue to see a sustained return of risk sentiment around the US dollar. And the Kiwi has certainly found support at the current levels. But from a longer-term point of view, the interest rate differentials between Fed expectations and RBNZ expectations, there is little to drive traders into maintaining long NZD positions. For now, the Fed are happy to take a wait and see approach around the impacts of tariffs, with reinflation a major concern. They do not want to cut rates at this point, but of course may have to a few months down the line. Meanwhile traders are expecting that the RBNZ will need to cut another 100bp from the OCR, in order to support activity in our own economy. This is looking more and more likely, as we are starting to see in the data points, with business confidence having taken a dive on the back of tariff uncertainty. While Economists are reporting on green shoots in the economy, business intentions are wary. We see a renewed downside risk within the recent ranges for the Kiwi dollar from here.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Here at home, Wednesday will see back-to-back releases of the RBNZ's bi-annual Financial Stability Report and then Stats NZ's March quarter update on the Kiwi labour market. The Kiwi labour market likely loosened further over the quarter as jobs growth fails to keep pace with population growth. The unemployment rate is expected to climb to 5.3% from 5.1%, marking the highest its been since December 2016. Growing slack in the labour market should also see further easing in annual wage growth to 2.7% from 2.9%.
• Central banks will take centre stage this week, with both the Federal Reserve and the Bank of England scheduled to meet on Thursday. In the US, the Fed is widely expected to keep interest rates on hold, though markets continue to price in just under 100 basis points of cuts by year-end. For now, it seems US officials may be trying to buy time as they continue to assess tariff implications and the uncertain environment. Across the pond however, the BoE is expected to deliver a 25bps cut to 4.25% after pausing in March. And with global growth forecasts being slashed, expectations are on the BoE to flag the increased downside risks and potentially signal faster policy easing.
• The US trade balance for April will be keenly anticipated. Already, the data has soured with a surge in imports ahead of tariffs. In March, the goods trade balance disappointed with the deficit growing to $162bn.
• More higher-frequency data from China is due this week, which may show early signs of damage to the economy from the tariff trade war with the US. Export and import data for the month of April will be the highlight. There are growing anecdotal reports flagging a sharp slide in shipments, which will likely mean weaker Chinese exports. The April update may show the first signs of this, with coming months likely to show more of the tariff fallout.

See our Weekly Calendar for more.