The Roundup – May 2025
Downbeat US Data
While the pause on reciprocal tariffs resulted in a much less volatile month compared to April, tensions still bubbled away as the understanding between Beijing and Washington around unwinding some of the recently imposed trading duties appeared to deteriorate.
As the self-imposed early July deadline to complete trade negotiations crept closer, there was an increased sense of urgency from the US to secure more deals, with only the UK agreement to show so far. At the same time, further duties issued by Washington on steel imports from the European bloc caused negotiation talks with Brussels to flare up.
Questions around the legality of the mechanism used to impose tariffs on goods imported into the US, has ramped up in recent weeks. Investors on the other hand, were more dismissive of subsequent tariff announcements, given the retractions and postponements from the initial rounds of levies resulted in limited enforcement.
Following the IMF’s April downward revision to US growth projections (citing increased policy uncertainty, trade tensions and reduced demand momentum) the OECD also moved to moderate their forecasts. GDP estimates for 2025 and 2026 were lowered to 1.6% and 1.5%, respectively, while escalation of protectionist policies would likely see further cuts.
US data for May provided an early indication of a potential reduction in economic activity as manufacturing for the month fell, going against expectations for an increase and marked the third consecutive monthly decline. Similarly, the services sector also contracted, surprising against expectations for a lift. Production, new orders, and inventories also shrank.
The final week of May saw the US dollar sell off, as markets considered the ultimate impact from the Administration’s trade policy as likely to dampen growth, lift unemployment, and stoke inflation. A return of inflationary forces could pose a long-lasting impact or depending on the underlying components and drivers could potentially be more transitory in nature.
The US Federal Reserve met in May, opting to hold interest rates for their third consecutive meeting. However, opinions within the Committee were more fractured as some members viewed any potential lift in inflation as temporary, while others were more cautious, remaining data dependent to determine how things may evolve.
The month also saw progress on the Big, Beautiful Bill - the Administration’s tax and spending package, which narrowly passed through the House and now sits with the Senate. Estimates are for the bill to add trillions to US public debt, while the rapidly growing federal debt has raised further questions around the country’s long-term financial stability.
Echoing these concerns, rating house Moody’s downgraded US sovereign debt from its Aaa credit rating, citing the size of the debt pile and how large it may eventually grow. Simultaneously, Fed officials linked concerns over rising government borrowing to higher borrowing costs, as bond and treasury yields rose over the month.
Sovereign credit downgrades erode investor confidence, while lower credit ratings generally result in higher bond yields. As commercial banks use government bond yields to set their own interest rates, this in turn risks an increase of interest rates on things like mortgages.
In contrast the end of May saw the RBNZ issue its 6th consecutive cut to the official cash rate (OCR), lowering interest rates by a total 2.25% since its peak. While the 0.25% cut was generally anticipated, this was not the only option considered by the committee.
RBNZ officials debated the domestic impact of events further afield, specifically whether higher US tariff levels were influencing kiwi inflation expectations, which rose 0.3% - 0.1% since the previous Monetary Policy Statement in February but remained within target.