Cooling U.S. employment and the Fed's patient wait-and-see stance lower the probability of a near-term rate hike

Overview

This report is Nomura's weekly macro update on the U.S. economy, focusing on June employment data, Federal Reserve communication and policy outlook, the Supreme Court's ruling regarding Fed Governor Lisa Cook, the path to USMCA renewal, manufacturing surveys, Q2 GDP tracking, and key data in the coming week. Overall, the report believes the U.S. economy remains resilient, but with marginal cooling in employment data and inflation still above target, policymakers are more likely to remain patiently on hold.

Core views

The report believes June nonfarm payrolls came in below expectations and historical data were revised down, making the labor market appear to be cooling at the margin; although the unemployment rate declined, household survey details were weak, so this should not be seen as a significant improvement in employment. Recent remarks from Warsh and other Fed officials have lowered the probability of a July rate hike and support the Fed staying on hold for the foreseeable future. However, core inflation remains well above the 2% target, and AI-related supply shortages, energy price spillovers, and wage stickiness may keep inflation risks tilted to the upside. If the Fed responds too slowly to inflation pressures, it may later face the risk of having to hike rates again to restore credibility.

Analysis framework

The report combines official macro data, employment and wage subcomponents, household survey data, alternative labor market indicators such as JOLTS and the Conference Board, speeches by Fed officials, policy and legal events, trade policy developments, ISM and regional manufacturing surveys, GDP tracking models, and the upcoming data calendar to form a comprehensive judgment on the U.S. growth, inflation, and policy path.

Methodology notes

• High-frequency macro trackingPrincipal Component Analysis (PCA)

  Uses 13 daily and weekly U.S. industrial and consumer indicators to estimate a latent factor and calibrates it to track year-over-year changes in quarterly GDP.

  This method extracts the common fluctuations of high-frequency indicators through the first principal component to help assess the momentum of economic activity.

• GDP nowcastingQ2 GDP tracking

  Updates the Q2 GDP tracking estimate based on capital goods shipments, auto sales, employment data, and historical revisions.

  The report lowered Q2 real GDP tracking from 2.4% to 2.3%, while real final sales to private domestic purchasers remained at 2.8%.

• Policy event analysisFedspeak and institutional risk assessment

  Assesses the monetary policy reaction function and Federal Reserve independence through Warsh's remarks, FOMC communication, the Supreme Court ruling, and task force arrangements.

  The report believes recent remarks point to patient observation, but the Cook ruling leaves procedural tail risks, and political pressure may still affect how markets price Fed independence.

Asset mapping & comparison

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

• Federal Reserve policy rate

  Directly influenced by employment, inflation, and Fedspeak

  Strengths

  June employment data were dovish, and recent official remarks support waiting and observing, reducing the probability of a July rate hike.

  Weaknesses

  Core inflation remains above target, and hawkish officials are still concerned about sticky inflation.

  Comparison

  Compared with an immediate rate hike, the report is more inclined toward the Fed remaining on hold.

  Risks

  If inflation pressures persist or the Fed falls behind the curve, rapid rate hikes may still be needed later.

• U.S. Treasuries

  Influenced by growth tracking, inflation expectations, and the policy path

  Strengths

  Slower employment growth and policy patience may ease upward pressure on front-end rates.

  Weaknesses

  Elevated inflation forecasts, the fiscal outlook, and political risks may limit declines in long-end yields.

  Comparison

  Signals of a short-term policy pause are somewhat supportive for bonds, but medium-term inflation and fiscal risks leave the yield curve facing uncertainty.

  Risks

  Energy shocks, supply chain bottlenecks, or damage to Fed independence could trigger yield volatility.

• U.S. risk assets

  Influenced by growth resilience, policy expectations, and the AI cycle

  Strengths

  Economic activity remains resilient, and fiscal stimulus, easing tariff uncertainty, and loose financial conditions support growth.

  Weaknesses

  The AI boom brings both valuation and supply pressures, while annual trade reviews may increase corporate uncertainty.

  Comparison

  Growth resilience is better than in a recession scenario, but policy and inflation risks remain higher than in a mild soft-landing scenario.

  Risks

  A collapse of the AI boom, geopolitical escalation, or political pressure undermining Fed credibility.

Key data

• June nonfarm payrolls57kBelow Nomura's forecast of 70k and the market consensus of 113k.
• Revision to prior two months' nonfarm payrolls-74kThis brought the three-month average job gain down to 111k.
• June unemployment rate4.2%Down from 4.3% in May, but household survey details were weak.
• Labor force participation rate for ages 25-34Down 1.6 percentage pointsThe report says the decline was fairly broad across education levels.
• ISM manufacturing index53.3Declined slightly in June, but demand indicators remained solid.
• Q2 GDP tracking2.3% q-o-q arRevised down from 2.4% last week; real final sales to private domestic purchasers remained at 2.8%.
• Q4 2026 core PCE forecast3.3% y-o-yThe report expects core inflation to remain significantly above the Fed's 2% target.
• ISM services forecast53.3Expected to decline from 54.5 in May in June.
• May trade deficit forecast$78.5bnExpected to widen from $55.9bn in April.
• June existing home sales forecast4.24mn saarExpected to be above 4.17mn in May.

Impact & implications

For the rates market, cooling employment and Warsh's dovish remarks reduce the risk of a near-term rate hike and support the Fed remaining on hold; however, upside inflation risks, AI-related supply bottlenecks, and energy shocks mean medium-term policy risks have not shifted to clearly easing. For risk assets, growth resilience and a policy pause support sentiment, but disputes over Fed independence, annual USMCA reviews, a possible reversal of the AI boom, and supply chain pressures may still bring volatility.

Risks

• Further geopolitical escalation could tighten financial conditions and worsen the fiscal outlook.
• Political pressure on FOMC members could weaken Fed credibility and trigger sharp market reactions.
• If the AI boom reverses, it could lead to a material adjustment in asset valuations.
• Storage chip shortages and supply chain disruptions caused by the Iran war could trigger a second round of commodity price increases.
• Annual USMCA reviews or narrower exemptions could institutionalize trade volatility and weigh on growth.
• The Supreme Court's ruling in the Cook case supports Fed independence, but does not fully eliminate the tail risk of another attempt to remove her.

What to watch

• Information in the June FOMC minutes regarding disagreements over the policy path, the dot plot, productivity, the balance sheet, and task forces.
• The ISM services index, business activity, new orders, employment index, and supplier delivery times.
• The May trade balance and whether the surge in imports continues.
• Whether initial and continuing jobless claims continue to show limited labor market stress.
• Whether existing home sales are supported by more homes for sale and lower geopolitical uncertainty.
• The members of the Fed's five task forces to be announced by Warsh, especially the communications task force that Mervyn King may co-lead.