Hawkish data supports the Fed staying on hold

Overview

This Nomura "US Economic Weekly" focuses on U.S. employment, inflation, geopolitical risk, tariff policy, and GDP tracking. The report argues that March employment data were strong, core inflation pressure re-emerged, and the Iran war added risks to energy prices and inflation expectations, leaving the Fed with little room to cut rates in the near term.

Core views

The core view is that U.S. growth momentum remains resilient, the labor market has stabilized after the earlier slowdown, and inflation is still above the Fed's 2% target with upside risks. The report expects core PCE inflation to remain at historically elevated levels, and near-term inflation pressure should keep the Fed on the sidelines at least through September. Nomura also believes tariff uncertainty has eased somewhat, but AI-related supply shortages, sticky wage inflation, slow rent disinflation, and the Middle East energy shock may still limit the downside in inflation.

Analysis framework

The report combines macro high-frequency data tracking, forecasts for employment and inflation components, a forward-looking assessment of policy meeting communications, geopolitical event evaluation, and GDP nowcast-style tracking. The employment section focuses on nonfarm payrolls, the unemployment rate, wages, industry breadth, and cyclical cohort performance. The inflation section breaks out core goods, rents, OER, supercore, PCE-related components, and energy price shocks. The policy section combines FOMC communication, reserve management purchases, and changes in political pressure to judge the rate path.

Methodology notes

• macro_data_trackingGDP tracking estimate

  Dynamically updates quarterly annualized GDP growth forecasts using released and upcoming data.

  Nomura incorporated the week's retail sales, auto sales, capital goods imports, ISM manufacturing, and next week's forecasts into its model, and adjusted Q1 GDP tracking from 2.3% to 2.0%.

• inflation_forecastCPI/PCE component decomposition

  Derives core CPI and core PCE forecasts using CPI, PPI, import prices, and component-level price projections.

  The report separately forecasts core goods, rents, OER, airfares, medical care, and energy components to determine the March core CPI and core PCE trajectory.

• monetary_policyFed reaction function assessment

  Assesses FOMC policy bias using employment, inflation, inflation expectations, and financial conditions.

  The report argues that labor market stability and rising inflation risks will reinforce the Fed's data dependence and optionality, increasing the probability of staying on hold in the near term.

• geopolitical_riskenergy shock transmission

  Evaluates how Middle East conflict transmits into oil prices, inflation expectations, and the policy path.

  The report treats the Iran war as an important variable that could push up gasoline prices, short-term inflation expectations, and hawkish risk for the FOMC.

Asset mapping & comparison

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

• U.S. Treasuries

  Most directly affected by the Fed staying on hold and delayed rate cuts.

  Strengths

  Growth resilience and sticky inflation support a higher-for-longer rate environment, limiting downside in short-end yields.

  Weaknesses

  If employment weakens materially or inflation falls back quickly, rate-cut expectations could be repriced lower again.

  Comparison

  Compared with risk assets, U.S. Treasuries more directly reflect the FOMC policy path and inflation risk.

  Risks

  Iran war-driven oil price spikes, inflation expectation de-anchoring, or political pressure undermining Fed credibility.

• U.S. dollar

  Supported by relative rate differentials and safe-haven demand.

  Strengths

  Delayed Fed cuts and Middle East risk may provide temporary support for the dollar.

  Weaknesses

  If the market shifts to pricing future cuts or U.S. growth slows, dollar support will weaken.

  Comparison

  Compared with commodity currencies and low-yield currencies, the dollar is more sensitive to rate spreads and safe-haven flows.

  Risks

  A reversal in policy expectations, worsening fiscal outlook, or easing geopolitical risk.

• U.S. equities

  Affected by a combination of growth resilience, high rates, and the AI cycle.

  Strengths

  Consumption, investment, and AI-related capex still provide growth support.

  Weaknesses

  High rates and sticky inflation may cap valuations, and a collapse in the AI boom would trigger asset-price adjustments.

  Comparison

  Compared with rate assets, U.S. equities rely more on earnings resilience to offset valuation pressure.

  Risks

  An AI bubble burst, tighter financial conditions, and escalating geopolitical conflict.

• Crude oil and energy

  Middle East conflict affects headline CPI and inflation expectations through oil prices.

  Strengths

  An escalation in geopolitical risk could support energy prices.

  Weaknesses

  The report believes WTI futures imply the recent oil price spike may be short-lived, and the U.S. economy is relatively insulated from oil price shocks.

  Comparison

  Compared with core inflation, energy affects headline CPI more quickly but may be shorter-lived.

  Risks

  An expanded supply shock due to escalation in the Strait of Hormuz or regional conflict.

• Inflation-protected assets

  Affected by sticky core inflation and energy shocks.

  Strengths

  If inflation expectations rise, these assets have protection value.

  Weaknesses

  If the energy shock is temporary and core PCE falls back, demand for inflation protection may decline.

  Comparison

  Compared with nominal bonds, inflation-protected assets are more directly exposed to shifts in inflation expectations.

  Risks

  Inflation falls faster than expected or tighter Fed policy pushes real yields higher.

Key data

• March nonfarm payrolls178kThe largest monthly increase since December 2024.
• March unemployment rate4.256%Rounded to 4.3%, the lowest since June 2025.
• Three-month average employment growth68kShows stabilization after earlier weakness.
• Private-sector payroll breadth56.8%The highest since 2023.
• Average hourly earnings m-o-m0.24%Below Nomura's and the market consensus forecast of 0.3%.
• March core CPI forecast0.286% m-o-mUp from 0.216% in February, mainly due to a rebound in core goods and rents.
• March core goods inflation forecast0.301% m-o-mThe highest since January 2025, affected by semiconductor shortages and import prices.
• March supercore CPI forecast0.336% m-o-mOnly a modest pullback from 0.350% in February.
• March core PCE forecast0.263% m-o-mDerived from CPI and PPI forecasts and still at a historically elevated level.
• March headline CPI forecast0.971% m-o-mThe Iran war pushed energy prices higher, and the energy component is expected to rise 10.9% m-o-m.
• Q1 GDP tracking estimate2.0% q-o-q arLowered from 2.3% last week; actual private domestic final sales remained at 2.3%.
• 2026 core PCE forecast2.8% y-o-y in Q4 2026Still above the Fed's 2% target.
• Expected rate cut timingSeptember and December 2026Delayed due to easing near-term political pressure and price pressure from the Iran war.
• Reserve management purchases$40bn/month to $20-25bn/monthThe report expects the monthly purchase pace may be reduced after the April tax season.

Impact & implications

The report's asset implications are hawkish: employment and inflation data reduce the probability of near-term rate cuts, and the front end of the yield curve may remain elevated; if the energy shock lifts inflation expectations, real yields and risk asset valuations could come under pressure. At the same time, U.S. growth resilience still supports corporate earnings and cyclical demand, but if the AI boom fades, geopolitical conflict escalates, or the Fed's credibility is hit by political pressure, financial conditions could tighten quickly.

Risks

• A further escalation in Middle East geopolitical risk, leading to higher energy prices, tighter financial conditions, and a worsening fiscal outlook.
• Broader inflation pressure or de-anchored inflation expectations, making it harder for the Fed to cut rates.
• Rising political pressure on FOMC members, which could weaken Fed credibility and trigger a sharp market reaction.
• If the AI boom bursts, asset valuations could correct significantly.
• Part of the current labor market strength may be driven by temporary factors such as weather normalization and the end of strikes, creating downside risk later on.
• Tariff and pharmaceutical tax policy remain uncertain and could affect goods prices and corporate costs.

What to watch

• March CPI details for core goods, rents, OER, airfares, and energy.
• FOMC minutes discussions on data dependence, rate-hike risk, the Iran war, and reserve management purchases.
• Whether initial and continuing jobless claims continue to confirm labor market stabilization.
• Whether the NY Fed consumer expectations survey and the University of Michigan consumer sentiment survey show rising inflation expectations.
• Developments in the Iran war, the Strait of Hormuz, and U.S. military deployments.
• The scope of tariff exemptions, the pace of pharmaceutical tariff implementation, and corporate reshoring commitments.
• Revisions to Q1 GDP tracking for consumption, equipment investment, and inventories.