Insights 
VT 
The strained functioning of global markets poses challenges. Supply-side impacts from tariffs are projected to affect New Zealand.
There is uncertainty regarding the realignment of the global economy’s framework due to tariffs. This uncertainty primarily affects confidence levels.
New Zealands Labour Market
New Zealand’s labour market data reflects a subdued economy. The unemployment rate stood at 5.1%, compared to the expected 5.3%.
The Reserve Bank of New Zealand is likely to reduce its projections for global economic activity. This adjustment is driven by current global economic conditions.
Market reactions to the softer unemployment figure have been relatively modest. Although 5.1% is technically better than anticipated, the improvement is disappointing when examined in the context of falling job creation. Real wage growth continues to stagnate, which puts downward pressure on household spending. With private consumption making up a large share of GDP, any contraction there will weigh on broader output levels.
This backdrop presents a narrowing window for policymakers. With the Reserve Bank inclined to scale back growth forecasts, the likelihood of further monetary easing becomes more plausible. That said, accommodative policy alone cannot counterbalance diminishing external demand or prolonged trade disruption. What we’ve seen so far points to a slowing environment rather than an abrupt correction, though complacency would be misplaced.
Policymaker Challenges
Orr’s team faces a difficult task in deciding when to intervene and by how much. Policy missteps at this point could accentuate economic fragility rather than contain it. We’re already looking at divergence in rate expectations between central banks. That divergence matters more this month, especially for relative value positioning in swap spreads and the OIS curve.
Short-end pricing reflects a growing sense that inflation is unlikely to return to target ranges any time soon. That brings attention back to the volatility surface, which has started to flatten in recent sessions. If realised market moves remain muted despite underlying risks, there’s logic in favouring long volatility expressions. Timing and tenor selection will matter, particularly as overnight indexed forward markets begin adjusting to any hawkish pivots abroad.
The recent adjustments in long bonds also require assessment. The steepening that followed last week’s commodity data hints at duration sensitivity to input prices. Still, with forward guidance barely shifting, more persistent changes in the long end would need confirmation by way of core inflation or structural employment shifts. Neither appears imminent.
Elsewhere, cross-market correlations are breaking down. Traditional hedges are delivering less predictable results, interrupting otherwise reliable arbitrage paths. When uncertainty stems from policy behaviour rather than just data misses, the standard filters for risk calibration tend to fail. We must adjust for that in our implied-volatility assumptions and recalibrate delta exposure accordingly.
The coming fortnight includes several event risks that may shift base-rate expectations. If Jackson’s speech from last quarter is anything to go by, it wouldn’t surprise anyone to see more fuss about neutral rate estimation. A reminder: any shift in equilibrium rate thinking tends to extend beyond short-term forecasting. The adjustment filters into the whole curve. Again, we must be quicker to reflect those changes in our forward pricing models.
Weekly positioning data shows a reduced appetite for directional exposure in rate markets. That’s not inertia—it reflects caution. As spreads compress and carry trades lose their appeal, capital is rotating into synthetic structures. Here, skew remains minor; there’s value to be found by widening the halo around central strikes. We keep hearing that risk is tilting one way, but such statements overlook the timing constraints that face leverage-adjusted positions. Without an immediate trigger, optionality must be kept modular and unwindable.
In essence, we’re operating in a time where central policy, trade relations, and local data fail to align neatly. When the parts move in different directions and respond to different signals, linear models break down. That’s precisely the moment when judgment starts outperforming automation. Behavioral shifts in markets are visible before they become measurable. We should keep our ears closer to the floor than to the ceiling.
