Nomura expects U.S. growth momentum to continue, but inflation still prevents the Federal Reserve from cutting rates

Overview

This is a Nomura U.S. economic weekly note focusing on a June inflation read-through, the Federal Reserve monetary-policy framework task group, Warsh's upcoming congressional testimony, U.S. growth momentum, and key macro data for the coming week. The core storyline is that U.S. growth remains resilient, inflation shows some technical easing but is still above target, and the Federal Reserve has limited room to cut rates.

Core views

The report expects June core CPI to be 0.215% m-o-m, with core goods prices weaker as tariff effects fade and used-car prices fall, while supercore CPI rises to 0.373% m-o-m. Core PCE is expected to slow to 0.271% m-o-m and around 3.4% y-o-y, with a methodological change to future PCE likely lowering y-o-y core PCE by about 20 bps. On policy, Nomura believes the Fed task group composition has not conveyed a clear policy tilt, and Warsh's testimony is also unlikely to provide a new policy roadmap. Over the medium term, growth momentum, fiscal support, accommodative financial conditions, and AI investment support the economy, but elevated inflation and hawkish rhetoric are expected to keep the Fed on hold for an extended period.

Analysis framework

The report uses a high-frequency macro forecasting framework, combining CPI, PPI, PCE components, rent, energy, wages, consumption, industrial production, real estate, and labor market data to form weekly views on inflation, growth, and monetary policy. It also evaluates the policy reaction function through Fed task group composition, public remarks, and congressional hearing scheduling.

Methodology notes

• inflation decompositionCPI and PCE component forecasting

  Derive monthly core inflation from core goods, supercore services, rent, investment advisory services, airfares, and other components.

  The report notes that weakness in core CPI does not fully feed through to core PCE, because prices for investment portfolio management and investment advisory services in PPI contribute materially to PCE.

• policy analysisFederal Reserve reaction function assessment

  Judge the policy path using inflation levels, Fedspeak, task group composition, and political pressure.

  Nomura believes that the task group appointments do not show a clear policy tilt, and high inflation together with hawkish remarks make it difficult for the Federal Reserve to shift toward rate cuts.

• growth trackingGDP tracking

  Adjust quarter GDP expectations using retail sales, industrial production, investment, consumption, and final sales data.

  The report revises the Q2 GDP tracking estimate down from 2.4% to 2.3%, while slightly revising up private domestic final demand (real final sales to private domestic consumers) to 2.9%.

Asset mapping & comparison

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

• U.S. interest rates

  With inflation above target and the Fed expected to stay on hold for an extended period, the short end is supported.

  Strengths

  Resilient growth and hawkish Fedspeak increase the credibility of maintaining rates at elevated levels.

  Weaknesses

  PCE methodological adjustments and falling energy prices could temporarily ease inflation pressures.

  Comparison

  Compared with a rate-cut trade, the report places more emphasis on rates staying elevated and the possibility of being forced to tighten again.

  Risks

  If inflation falls quickly or growth weakens markedly, the rate path could turn more dovish.

• U.S. equities

  Economic resilience and broadening AI investment support earnings expectations, but high rates and valuation risks are constraints.

  Strengths

  Corporate investment is spreading beyond the AI sector into a broader base, and consumption still benefits from wage income and tax refunds.

  Weaknesses

  Financial pressure on lower- and middle-income households is rising, and K-shaped divergence may limit breadth of consumption.

  Comparison

  Compared with a traditional cyclical expansion, this growth phase depends more on AI capex, fiscal stimulus, and accommodative financial conditions.

  Risks

  A rupture in the AI boom could trigger a significant repricing of asset valuations.

• Semiconductors and electronic components

  AI-related shortages in memory chips, electricity, and related areas could become a new source of price pressure.

  Strengths

  AI-driven corporate capex demand supports interest in semiconductors and related electronic components.

  Weaknesses

  The report says that the global chip shortage in June did not materially lift consumer electronics prices.

  Comparison

  As tariff and oil-price pressure eases, market focus shifts toward AI-driven inflation pressures.

  Risks

  Persistent memory-chip shortages and supply-chain disruptions could trigger a second-round surge in commodity prices.

• Oil and energy

  Declining oil prices are reducing energy CPI and import prices, easing headline inflation.

  Strengths

  The U.S. share of domestic energy production and energy commodity consumption is relatively low, making the economy relatively more resilient to Iran-war-related oil shocks.

  Weaknesses

  Energy-price volatility can still affect airfares, consumer confidence, and inflation expectations.

  Comparison

  The report suggests oil's short-term drag on headline CPI is clearer than its impact on core inflation improvement.

  Risks

  Geopolitical escalation could lift oil prices, tighten financial conditions, and worsen fiscal outlooks.

Key data

• June core CPI forecast0.215% m-o-mMay was 0.208%, April was 0.376%.
• June supercore CPI forecast0.373% m-o-mHigher than May's 0.273%, supported by rising lodging prices.
• June core PCE forecast0.271% m-o-m, about 3.4% y-o-yMay was 0.320% m-o-m; y-o-y remains clearly above the Federal Reserve target.
• PCE methodological adjustment impactabout -20 bpsMethodological changes in software and peripherals, investment portfolio management and advisory, and legal services are expected to pull down y-o-y core PCE.
• June headline CPI forecast-0.203% m-o-mEnergy is expected to decline 5.2% m-o-m, mainly led by falling gasoline prices.
• June retail sales forecast0.3% m-o-mLower than May's 0.9%, mainly hurt by weaker gasoline sales.
• June industrial production forecast0.6% m-o-mManufacturing output is expected to grow 0.4%, with automobiles and auto parts contributing most.
• Q2 GDP tracking estimate2.3% q-o-q annualizedRevised down from 2.4% the previous week; real final sales to private domestic consumers are 2.9%.
• Q4 2026 core PCE forecast3.3% y-o-yThe report believes core inflation remains above the 2% target, with upside inflation risk.
• End-2026 unemployment forecast4.1%The report expects the labor market to remain resilient and to show signs of re-acceleration.

Impact & implications

For markets, the report conveys a combination of resilient growth, persistent inflation, and non-accommodative policy. If near-term data confirm core PCE remains above target, it will support the Federal Reserve staying patient; if AI-related supply constraints and wage stickiness continue to push up service or commodity prices, rate risks could shift from delayed easing toward renewed talks of tightening. For equities, AI investment supports growth, but if the AI boom reverses, valuation risks are materially high.

Risks

• Further geopolitical escalation could tighten financial conditions and worsen fiscal outlooks.
• Political pressure on FOMC members could undermine Fed credibility, triggering sharp market reactions.
• If the AI boom breaks, asset valuations could experience material drawdowns.
• Persistent memory-chip shortages and Iran-war-related supply-chain disruptions could trigger a second-round rise in commodity prices.
• If the Fed responds too slowly to initial inflation pressures, it may need rapid rate hikes in the future to rebuild credibility.

What to watch

• June CPI, especially core goods, supercore services, rent, and energy components.
• June PPI, particularly prices of investment management, advisory services, electronic components, and semiconductors.
• The Beige Book's narrative on AI investment, K-shaped consumption divergence, employment, and price pressures.
• Non-gasoline consumption, controlled categories, and online sales performance in retail sales data.
• Whether industrial production, manufacturing output, and automobile and auto-part production confirm a rebound.
• Warsh's policy statements in House Financial Services Committee and Senate Banking Committee hearings.
• Whether the Fed task group’s follow-up recommendations are accepted by a majority of FOMC members.
• The actual downward revision magnitude to y-o-y core PCE from PCE price methodological changes.