The pace of employment growth has temporarily cooled, but the resilience of US growth and inflation still keeps the Fed on hold
AI summary card
The pace of employment growth has temporarily cooled, but the resilience of US growth and inflation still keeps the Fed on hold
Nomura expects June nonfarm payroll growth to slow to 70k and the unemployment rate to remain at 4.3%, but consumption, investment, and inflation remain resilient, so it maintains its view that the Fed will keep the federal funds rate unchanged through the end of 2027.
- June nonfarm payrolls are expected to come in at 70k, mainly because some temporary employment support factors from May are fading, but the labor market as a whole is still viewed as resilient.
- The June unemployment rate is expected to remain at 4.3% after rounding, while average hourly earnings growth is expected to slow to 0.2% month over month, helping to restrain wage-sensitive supercore services inflation.
- In May, core PCE rose to 0.320% month over month and 3.412% year over year, with services as the main driver; however, trimmed mean inflation rose only modestly.
- Nomura lowered its Q2 GDP tracking forecast from 2.6% to 2.4% q-o-q annualized, but real final sales to private domestic purchasers remained at 2.8%.
- The policy view remains that the Fed will leave rates unchanged through end-2027; the likelihood of a near-term rate hike is not high, but the balance of risks is currently tilted toward tightening.
Report interpretation
Overview
This report is Nomura's weekly macro update on the US economy, focusing on June employment, Fed communication, PCE inflation, consumption, and business investment data. The report argues that US employment growth may retreat from previously strong levels, but this more likely reflects the fading of temporary factors rather than a clear deterioration in the labor market; at the same time, growth momentum remains intact, core inflation is above target, and Fed officials are sounding hawkish, making monetary policy more likely to stay on hold in the near term.
Core views
Nomura expects June nonfarm payroll growth to slow to 70k, the unemployment rate to remain at 4.3%, and average hourly earnings growth to slow to 0.2% month over month. On policy, the report believes Warsh will most likely continue the messaging seen after the June FOMC meeting at the Sintra conference and will not release any notably new signals. Recent concerns among Fed officials about inflation composition and sticky services inflation have reduced the probability of a July hike, but they have also weakened the likelihood of a near-term shift toward easing. Nomura maintains its view that the federal funds rate will remain unchanged through the end of 2027 and believes the current balance of risks is tilted more toward future tightening.
Analysis framework
The report cross-checks the resilience of the US economy using high-frequency and monthly macro data: it uses ADP, continuing jobless claims, PMI, and regional surveys to judge leading employment signals; it uses core PCE, trimmed mean PCE, wage indicators, and changes in PCE methodology to assess inflation trends; it updates GDP tracking using personal consumption, durable goods orders, core capital goods orders, and trade data; and it combines Fed officials' speeches and the dot plot to infer the policy reaction function.
Methodology notes
Dynamically update the quarterly annualized q-o-q GDP forecast using published consumption, investment, trade, and historical revision data.
Nomura lowered its Q2 GDP tracking forecast from 2.6% to 2.4% because the Q1 GDP revision and the widening May goods trade deficit offset the positive impact from domestic demand data.
Compare the core PCE price index with trimmed mean PCE to determine whether broad inflation trends are truly accelerating.
The report notes that in May core PCE rose to 3.412% year over year, while trimmed mean PCE rose only to 2.41% year over year. The large gap between the two suggests that how the Fed measures underlying inflation trends is crucial.
Assess the rate path by combining Fed officials' speeches, inflation composition, the labor market, and political pressure.
The report believes hawkish officials emphasize sticky services inflation and inflation composition, while doves focus more on temporary factors such as energy and tariffs; overall, the Fed is more likely to wait for more data.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- US ratesRelated to the Fed keeping rates higher for longer and the risk of potential tightening
- Strengths
- Resilient growth and labor markets support rates staying at relatively high levels.
- Weaknesses
- Easing wage pressure, lower oil prices, and changes in PCE methodology may reduce some inflation pressure.
- Comparison
- Compared with rate-cut trades, the report is more supportive of a long hold or even a somewhat hawkish rate path.
- Risks
- If employment weakens significantly or inflation falls quickly, the rate path could turn more dovish than the report expects.
- US dollarA relatively hawkish Fed path could support the dollar
- Strengths
- Resilient US growth and a prolonged unchanged policy rate help support interest rate differentials.
- Weaknesses
- If political pressure again drives rate-cut expectations or economic data deteriorate, support for the dollar could weaken.
- Comparison
- The report does not provide a direct dollar trading recommendation, only an indirect macro-policy implication.
- Risks
- Geopolitical risks, a worsening fiscal outlook, or changes in market risk appetite could alter dollar performance.
- US equitiesResilient growth supports earnings expectations, but high rates and AI valuation risks are constraints
- Strengths
- Consumption, business investment, and the broadening of investment beyond AI show that economic fundamentals remain stable.
- Weaknesses
- The Fed not cutting rates could increase valuation discount pressure.
- Comparison
- The report lists a bursting AI boom as one of the risks for asset valuation corrections.
- Risks
- A fading AI boom, chip shortages, geopolitical conflict, or tighter financial conditions could trigger a valuation pullback.
- Crude oil and energy-sensitive inflationChanges in oil prices affect the inflation narrative and Fed communication
- Strengths
- Falling oil prices may be seen as a signal of an improving inflation outlook.
- Weaknesses
- Energy shocks related to the Iran war and supply chain disruptions could still bring second-round goods price pressure.
- Comparison
- The report believes the US economy is relatively insulated because household energy goods consumption is a small share and because of domestic energy production.
- Risks
- An escalation in geopolitical conflict could push oil prices higher, tighten financial conditions, and worsen the fiscal outlook.
Key data
- June nonfarm payroll forecast70kSlightly below the year-to-date average, mainly due to the fading of temporary support factors in May.
- June unemployment rate forecast4.3%Expected to edge up slightly but remain unchanged after rounding.
- June average hourly earnings forecast0.2% m-o-mAlternative wage indicators continue to decline slowly, with wage pressure easing at the margin.
- May core PCE0.320% m-o-m; 3.412% y-o-yAccelerated from 0.250% in April on a month-over-month basis, mainly driven by services components.
- May PCE trimmed mean0.23% m-o-m; 2.41% y-o-yOnly a modest increase from April, indicating that underlying inflation has not accelerated significantly.
- Q2 GDP tracking2.4% q-o-q arLowered from 2.6% last week; real final sales to private domestic purchasers remained at 2.8%.
- JOLTS job openings forecast7050kExpected to fall in May from 7618k in April, with the V-U ratio declining to 0.96.
- Year-end unemployment rate forecast4.1%The report expects improved labor demand to bring the unemployment rate down by year-end.
Impact & implications
For the rates market, the core implication of the report is that the US economy is not yet weak enough to push the Fed toward easing, while inflation remains above the 2% target and sticky services inflation along with hawkish communication constrain rate-cut expectations. If employment data merely cool from unusually strong levels, it may not materially alter the Fed's wait-and-see stance; by contrast, if inflation reaccelerates or the Fed's credibility is challenged, markets need to guard against policy tilting back toward tightening.
Risks
- Further escalation of geopolitical risks could tighten financial conditions and worsen the fiscal outlook.
- Rising political pressure on FOMC members could undermine Fed credibility and trigger sharp market reactions.
- If the AI boom bursts, it could lead to a meaningful correction in asset valuations.
- Persistent memory chip shortages and supply chain disruptions caused by the Iran war could trigger a second round of goods price increases.
- If the Fed responds inadequately to early inflation pressures, it may need to raise rates more quickly later to rebuild credibility.
What to watch
- Whether June nonfarm payrolls match the expected slowdown to 70k, and whether the unemployment rate remains at 4.3%.
- Whether average hourly earnings, the Atlanta Fed Wage Growth Tracker, and ADP Pay Insights continue to show easing wage pressure.
- How Warsh describes the Middle East situation, falling oil prices, and the labor market at the Sintra conference.
- Whether June inflation data can change the Fed's waiting mode, especially services inflation and supercore services inflation.
- Next week's data including JOLTS job openings, ISM manufacturing, consumer confidence, auto sales, and initial jobless claims.
- The extent of the downward revision to core PCE year over year from the PCE methodology changes to be implemented by the BEA on September 30, 2026.