Latest news with #COTW
Scoop
15 hours ago
- Business
- Scoop
We're In The Eye Of The Storm, As Tailwinds Become Headwinds
Press Release – Kiwi Economics Our COTW takes a look at the slowdown in US output, but rise in inflationary pressure. Last week was very much a US story. To be fair, these day's that's become the norm. But between friendship fallouts, and a number of slowing US indicators, there was plenty to digest. We've seen a front loading of activity in anticipation of tariffs. And we may now be seeing the start of the unwind. Both of which cloud what's happening to the actual trend growth beneath. There has been a shock to sentiment, and conditions are deteriorating. Our COTW takes a look at the slowdown in US output, but rise in inflationary pressure. Here's our take on current events 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 COTW 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. Chart of the Week: US firms are feeling the heat. Cracks in the US economy are starting to form. The recent flow of high-frequency data isn't looking too good. The ISM surveys for the month of May were especially disappointing. The manufacturing PMI fell from 48.7 to 48.5, the lowest in six months. And majority of its components also signalled contraction (a reading below 50). The new export orders fell 3pts, while production contracted for the third straight month and remains well below pre-covid levels. At the same time, the prices paid sub-index expanded for the fourth straight month, and the supplier deliveries sub-index rose 2pts suggesting a hoarding of inputs ahead of tariff escalation. The services PMI posted a deeper slide in May. Economic activity in the sector contracted for the first time since June 2024, with the index plunging 1.7pts and slipping into contractionary territory. The drop in the headline index reflected a plunge in the new orders component, down 5.9pts. And the prices paid sub-index increased to the highest level in 30months. Across both surveys, it's clear that output is beginning to slow, while inflationary pressures are heating up.
Scoop
03-06-2025
- Business
- Scoop
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%.
The Independent
11-04-2025
- Politics
- The Independent
It'll take more than a ‘reassurance force' to fill the US-sized hole in Nato's summit
There's a terrible sense of poignancy – if not doom – around all the meetings of the ' coalition of the willing ', impressive as the grandiloquent words, formidable roll call of nations and the glittering array of military uniforms may be. The latest gathering is today, and it's fair to say they are making progress in constructing the 'reassurance force' to help preserve the peace in Ukraine, albeit a peace that doesn't seem imminent. To be brutally frank, and with the best will in the world, these capable, dedicated ministers and generals may be wasting their time. At the Nato headquarters in Brussels, no less, some 30 countries, including the great majority of those in Europe, are gathering under the joint chairmanship of the UK defence secretary, John Healey, and his French counterpart, Sébastien Lecornu, to further plan the logistics of such a 'force' (which may not ever be authorised to use force, though we shall see). Anglo-French leadership seems natural, without being chauvinistic, as the two nuclear powers on the continent, UN permanent security council members and with the biggest and most experienced militaries. Emanuel Macron and Keir Starmer have provided exemplary cooperative and intelligent leadership to this grouping. It has mostly had to lie outside Nato, sadly, because America has no interest; and outside the European Union because Europe doesn't have an army, does have Putin sympathisers (Viktor Orban in Hungary), and crucial powers such as Britain and Norway aren't members. It also has the support of nations such as Canada, Japan, Australia and South Korean far away from Europe – and they are part of the 50-nation Ukraine Contact Group, also meeting this weekend. It is, if you like, the traditional Western alliances brought together – minus America. The coalition of the willing (COTW) is asymmetric, informal and bound by no treaty organisations – but that's no reason why if couldn't be effective. Countries do what they can, militarily, financially, and politically. Thus, a country such as Canada could contribute 'boots on the ground' while Poland, just next door to the conflict and now building one of the largest armies in Europe, feels that it must reserve its troops to its own vulnerable border. Japan and South Korea would have the comparative advantage in manufacturing and technology – useful for all in this trade war. Fair enough. Each brings to the effort what they can. The important thing is the commitment to Ukraine, to the collective security in Europe, and a shared fear of Russian domination and American abandonment. It could work. The COTW could be incorporated into a peace settlement. It could have rules of engagement and be present at the invitation of the government of Ukraine – not imposed on it. The relationship with Nato Article 5 obligations could be clarified – so America need not respond if the COTW troops are attacked. The COTW role and force size on the ground, in the air and the Black Sea could be codified. Europe and its partners have the financial and industrial strength to make it work – even without the vast strength of the Americans absent. Starmer and Macron have repeatedly tried to get the White House to commit in even the tiniest, tokenistic way, to providing a 'backstop' security guarantee for Ukraine. They didn't get it, and they won't. But even that isn't the biggest problem. The problem is American resistance to the whole idea. The danger is that if Putin doesn't like the COTW reassurance force – and everything suggests he hates it – and obstructs Donald Trump 's peace deal, then Trump will agree. The best Putin will accept so far is a conventional UN peacekeeping force, ie the kind of thing that was so recently proved useless and humiliated by Israel in Lebanon. No Nato members under whatever flag will be allowed in. If not, Putin carries on, likely with Trump's acquiescence – because it seems to me that Trump is basically a coward. So there will be no peace deal for the COTW to uphold, and a 'reassurance force' becomes redundant before it turns up for work. Trump and Putin will in effect impose a settlement on Ukraine that leaves it a puppet state; or Trump just cuts the aid to Ukraine, Elon Musk turns off the Starlink satellites the Ukrainian army relies on, and Putin grinds on with his war. Would the COTW send troops into a live conflict anyway? No. Public opinion would not allow it. All the other problems with the COTW are real but pale into insignificance if Trump decides it's not in America's interests, and gets in way of his peace settlement. How, for example, would the COTW function of Marine Le Pen or her proxy becomes president of France? She doesn't believe in it and her pro-Putin instincts are well-known. What if Russia rigs a Ukrainian election and the new leader tells the COTW to go home? And, on those rules of engagement, would the French, the British, the German public really support a war with Russia if Putin invaded and destroyed the 'reassurance force'? Or kept them hostage? Would we use a nuclear deterrent? Could we cope with seeing the coffins of British soldiers arriving back at RAF Brize Norton from the bloody Battle of Kyiv – another futile war, like Iraq or Afghanistan, to live through? How willing, in other words, would the coalition of the willing turn out to be?
