Cooling U.S. inflation supports the Fed staying on hold in the short term

Overview

This is a Nomura U.S. Economic Weekly report focusing on June inflation data, comments from FOMC officials, the resilience of U.S. growth, and a preview of data in the coming week. The report argues that June CPI and PPI together point to a notable cooling in core PCE, enough to reduce the probability of near-term rate hikes; however, U.S. consumption, the labor market, and economic activity remain solid, and core inflation is still above the Fed's 2% target, so the Fed is more likely to stay on hold rather than quickly pivot to rate cuts.

Core views

The report's core views include: first, June inflation was weaker than expected, with both core CPI and supercore CPI showing clear cooling, with some weakness coming from volatile items such as airfares, hotels, and auto insurance; second, price pressures in tariff-sensitive core goods remain limited, while AI-related consumer electronics price pressures are still contained; third, the June core PCE month-over-month forecast was lowered to 0.175%, while year-end core PCE year over year is still expected to be around 3.2% to 3.3%, and methodology adjustments could push the reading even lower; fourth, divisions among Fed officials remain, but most lean toward waiting in the short term; fifth, retail sales and GDP tracking indicate U.S. growth remains resilient.

Analysis framework

The report derives its core PCE forecast by breaking down CPI and PPI components, while also incorporating Fed officials' remarks, retail sales, the Beige Book, initial jobless claims, PMI, and new home sales, among other high-frequency or soon-to-be-released data, to form an integrated judgment on the inflation path, growth momentum, and the policy reaction function.

Methodology notes

• Inflation Forecastingcore PCE nowcast

  Use CPI and PPI components to map the core PCE month-over-month forecast

  Based on June CPI and PPI component performance, Nomura lowered its June core PCE month-over-month forecast from 0.271% to 0.175%, and uses this to assess near-term policy pressure on the Fed.

• Policy AnalysisFedspeak qualitative assessment

  Infer FOMC policy inclination through officials' remarks

  The report distinguishes between more wait-and-see or dovish remarks from Warsh, Williams, Cook, Jefferson, and Waller, and more hawkish remarks from Logan, Schmid, and Hammack, concluding that the overall signal still points to keeping rates unchanged in the near term.

• Growth Trackingweekly data tracker principal component analysis

  Use 13 daily and weekly U.S. indicators to extract latent factors for tracking real GDP

  The weekly data tracker uses principal component analysis to extract the first principal component that explains the largest share of total variance, and calibrates it to quarter-over-quarter changes in real GDP, in order to monitor economic activity momentum.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. federal funds rate

  Directly related

  Strengths

  Cooling month-over-month inflation and the wait-and-see tilt of most officials support staying unchanged in the short term.

  Weaknesses

  Core inflation remains well above the 2% target, leaving insufficient justification for cuts.

  Comparison

  Compared with an immediate hike or cut, the report places greater emphasis on a prolonged hold.

  Risks

  If AI demand, supply shortages, or geopolitical conflict push up inflation, the Fed may be forced into rapid hikes.

• U.S. Treasuries

  Highly related

  Strengths

  The downward revision to core PCE could ease upward pressure on front-end rates.

  Weaknesses

  Growth resilience and fiscal risks may limit declines in long-end yields.

  Comparison

  The short end is more affected by expectations of a Fed hold, while the long end is also influenced by growth, fiscal conditions, and risk premiums.

  Risks

  Political pressure, geopolitical conflict, or a reacceleration in inflation could drive yields higher again.

• U.S. dollar assets

  Indirectly related

  Strengths

  U.S. economic activity remains solid, and resilient consumption and investment support the fundamentals of dollar assets.

  Weaknesses

  Cooling inflation reduces the need for further tightening, which may weaken rate-differential support.

  Comparison

  Compared with a pure recession scenario, the report depicts an environment where resilient growth coexists with moderating inflation.

  Risks

  A valuation correction in AI assets, Iran war-related energy and supply-chain shocks, or political interference with Fed independence.

• U.S. housing market

  Moderately related

  Strengths

  The report expects June new home sales to recover from 580k to 600k.

  Weaknesses

  High mortgage rates and earlier geopolitical uncertainty remain headwinds.

  Comparison

  Housing data may better reflect pressure on rate-sensitive sectors than retail sales and PMI.

  Risks

  If mortgage rates stay high or financial conditions tighten, the housing recovery may prove unstable.

Key data

• June core PCE forecast0.175% m-o-mLowered from 0.271% previously, roughly equivalent to a 2% annualized pace.
• June core CPI-0.017% m-o-mNomura expected 0.215%, while market consensus expected 0.2%; this was the first monthly decline since May 2020.
• Year-end core PCE forecastabout 3.2%-3.3% y-o-yThe main text mentions around 3.2% by year-end, while the U.S. economic outlook table shows 3.3% for Q4 2026; BEA methodology adjustments could lower it by about 20bp to around 3.1%.
• June retail sales0.2% m-o-mThe previous reading was revised up; Nomura estimates real retail sales rose 1.3% month over month.
• Q2 GDP tracking2.9% q-o-q annualizedRaised from 2.3% the previous week.
• Real final sales to private domestic purchasers3.4%Raised from 2.9% previously.
• June new home sales forecast600k saarAbove May's 580k, implying expected growth of 3.4% month over month.
• Federal funds target midpoint forecast3.625%The outlook table shows it remaining at 3.625% at the end of 2026 and 2027.

Impact & implications

For asset pricing, cooling inflation reduces the probability of near-term hikes, supporting market pricing for a wait-and-see Fed stance; however, because growth remains resilient, core inflation is still above target, and some officials remain hawkish, the report does not support aggressively betting on a rapid restart of the easing cycle. If core PCE continues to moderate and the labor market stays stable, U.S. Treasury yields may be pulled by two opposing forces: easing inflation lowers front-end rate expectations, while solid growth and potential hike risks limit downside room.

Risks

• Further escalation of geopolitical risks could tighten financial conditions and worsen the fiscal outlook.
• Rising political pressure on FOMC participants could undermine Fed credibility and trigger sharp market reactions.
• A burst AI-related asset bubble could lead to significant valuation corrections and weigh on corporate investment.
• Memory-chip shortages and supply-chain disruptions caused by the Iran war could create second-round inflation pressures.
• Core inflation remains above the 2% target; if the Fed reacts too slowly, faster hikes may later be needed to restore credibility.

What to watch

• Whether the final June core PCE reading comes close to Nomura's 0.175% month-over-month forecast.
• Whether Waller and centrist officials at the July FOMC meeting continue to support staying on hold because of cooler CPI and PPI.
• Whether S&P manufacturing and services PMI remain in expansion territory and whether price indexes stay elevated.
• Whether initial and continuing jobless claims continue to show limited layoffs and labor-market resilience.
• Whether June new home sales rebound to around 600k.
• The actual downward revision to core PCE year over year from the BEA's planned PCE price methodology changes.