May Is Over, The Mayhem Is Not, And Markets Are Muddled

• Tariff volatility continues to dominate markets and the outlook. We’re far from any resolution. And the fragility of the global economy poses significant risk to our recovery here at home.
• Aware of all the risks, the RBNZ cut the cash rate to 3.25% last week. And despite the uncertain path ahead, there’s more cuts coming. That’s the key takeaway from the May MPS.
• Our COTW takes a look at the curious sell off in Kiwi rates following the RBNZ policy decision.

Here’s our take on current events

After a hectic month marked by a whirlwind of trade escalations and de-escalations, the Government’s budget release, and last week’s RBNZ Monetary Policy Statement, May has officially come to a close. The mayhem, however, is far from over. Tariff volatility continues to dominate financial markets. Whether it's the ongoing legal battle between the Trump administration and the courts over the legality of the "Liberation Day" tariffs, or the renewed tensions between the US and China – with each side accusing the other of violating their trade truce – or the proverbial (not literal!) shots aimed at the European Union, the economic landscape remains incredibly fragile.

There’s a lot of noise right now. And it’s hard for everyone, including policymakers, to make sense of it all. The RBNZ’s latest statement alone mentioned the word uncertain, or some or a form of it, 164 times across their 60 or so page statement. That’s about 3 mentions a page…

Nevertheless, the RBNZ delivered on expectations and delivered another 25bps cut. The cash rate sits at 3.25%. And there’s more cuts coming. That’s the key takeaway from the May MPS. Although the path from here is highly uncertain.

The OCR track was lowered from a flat lined bottom of 3.10% to a 2.85% trough in March 2026. So now another 25bps cut to 3% is fully baked into the cake. And from there, there’s a 60% chance of another 25bps cut to 2.75%. Once again, we would love to have seen a bit more. We’re still of the view that a 2.5% cash rate is what the Kiwi economy needs. And an OCR track bottoming anywhere below 2.75% would have signalled what we had hoped to see.

But with each MPS, the terminal OCR has moved closer to our 2.5% view. Give them time, and they just might get there. But for now, such heightened uncertainty is making it harder for all policymakers to navigate. So, it’s not surprising to see the committee err on the side of caution. The fact the RBNZ “voted” 5-1, with one member opting for a pause to assess, throws some doubt on the timing of the next move, but not the direction. They are not on a “pre-set course”, and always data dependent. We think there’s enough for them to cut again in July, but they may wait until August to cut again. It depends… on what? Everything.

All in all, we think there was a bit in the May MPS for everyone, dove or hawk. The RBNZ’s forecasts were markedly revised lower. The expected Kiwi economic recovery is forecast to be slower than projected in the February MPS with the RBNZ now forecasting 0.7% growth this year, down from 1%. And greater spare capacity than previously modelled also sees unemployment stay higher for longer. You can’t ignore that. And that’s the dovish part.

The hawkish part lies in the dissenting 5-1 vote and the accompanying hawkish tone in post MPS media conferences. Comments from Hawkesby including the statement that the Committee will have “no clear bias” heading into the July meeting, injected a dose of uncertainty. And together, these seeds of doubt gave markets something to run with. Rates, particularly in the short end saw a sizeable jolt higher (see our COTW for move on the move in markets). But we think markets, as they so often do, have gotten a bit carried away. Time will tell.

Charts of the Week: A less dovish, highly uncertain, RBNZ bias generated a mixed reaction in markets.

If you just read the statement, the RBNZ’s easing bias was strengthened. The economic forecasts were cut, and another 25bp rate cut was inserted into the OCR track (from a low of 3.1% to 2.85%). The track shows a clear bias to cut to at least 3% and there’s a 60% chance of a cut to 2.75%. That’s dovish. Because they’re still cutting. Our first chart shows with each MPS over the last year, the terminal OCR has moved closer to our 2.5% view. Give them time, and they just might get there.

The FX market read the statement. The Kiwi currency barely moved. The Kiwi currency reacted exactly as you’d expect. It fell. It rose. And then it fell again. It looked like a heart rate monitor around .5950. There wasn’t much change at all. There are bigger issues offshore for currency traders to grapple with.

If you listened to the press conference, the RBNZ’s top brass were crystal clear in their clouded uncertainty. Heightened uncertainty is making it harder for all policymakers to navigate. So, it’s not surprising to see the committee err on the side of caution. The fact the RBNZ “voted” 5-1, with one member voting for a pause to assess, throws some doubt on the timing of the next move, but not the direction. They are not on a “pre-set course”, and always data dependent. We think there’s enough for them to cut again in July, but they may wait until August to cut again. It depends… on what? Everything.

It was the “vote”, the first time in two years, that got interest rate traders (re)thinking. That seed of doubt caused a bit of a jolt, especially short end interest rates. The pivotal 2-year swap rate rose 10bps, from 3.16% to 3.26% (now 3.32%), as the implied terminal cash rate lifted from 2.85% to 2.95% (now 3%). See the second chart. It’s not a big move… but it was one Governor Christian Hawkesby pushed back on. The telling comment from Hawkesby, when asked about the market reaction, was his reference to the new OCR track matching market pricing prior to the announcement. The RBNZ’s OCR track matched market pricing of 2.85%. So they would not have expected much reaction at all.

We believe we are seeing some profit taking in wholesale rates markets. Hedge funds would have placed some bets that the RBNZ may have come out a lot more dovish.

We think the market will settle down, and end up moving back down to 2.85%, in time (and depending on what happens in offshore markets). And then, we expect another move by markets and the RBNZ down to 2.5%.

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