US job growth is expected to cool, but resilient growth and inflation keep the Fed on hold

Overview

This issue of the US Economic Weekly focuses on the June employment preview, Fed policy signals, PCE inflation, economic growth momentum, and data in the coming week. Nomura believes June job growth may slow significantly as temporary factors from May reverse, but the labor market overall remains resilient; inflation is still above the Fed’s target, and growth data have not shown a clear loss of momentum, so the Fed will continue to treat inflation as the key constraint.

Core views

The report’s core views include: first, June nonfarm payrolls are expected to increase by 70k, below the average since the start of the year, mainly reflecting the fading of temporary factors such as leisure and hospitality and local government hiring; second, the unemployment rate is still expected at 4.3%, with low layoff indicators implying no significant deterioration in the labor market; third, wage growth is expected to slow to 0.2% MoM, helping restrain wage-sensitive services inflation; fourth, May core PCE accelerated on the back of services components, but trimmed mean indicators suggest underlying inflation has not clearly re-accelerated; fifth, Nomura maintains its view that the Fed will not change rates through end-2027, with the near-term probability of a hike falling, but if inflation persistence continues, the Fed may later face the risk of having to hike rapidly to rebuild credibility.

Analysis framework

The report forms its judgment by combining macro data previews with high-frequency validation: using ADP, continuing jobless claims, PMIs, and regional surveys to assess employment momentum; using core PCE, trimmed mean PCE, CPI-PCE differences, and BEA methodological adjustments to assess inflation trends; updating GDP tracking with personal consumption, durable goods orders, capital goods orders, and the goods trade deficit; and also judging the policy path by combining the FOMC dot plot, official remarks, and changes in political pressure.

Methodology notes

• Labor MarketNFP/JOLTS/ADP/PMI Cross-Validation

  Use leading employment indicators, jobless claims, survey employment subcomponents, and industry anomalies to judge the direction of nonfarm payrolls.

  Nomura believes May nonfarm payrolls were supported by some temporary factors that will reverse in June, but layoff indicators remain low and labor demand has stabilized, so slower growth does not mean the labor market is stalling.

• Inflation AnalysisCore PCE vs. Trimmed Mean PCE Comparison

  Compare core inflation with trimmed mean inflation to identify the impact of services components or extreme components on overall inflation.

  Core PCE accelerated noticeably in May, but the trimmed mean rose only slightly; the report believes this highlights the importance of how underlying inflation trends are measured.

• Policy AssessmentFedspeak and Dot Plot Mapping

  Combine Fed officials’ remarks, the dot plot, and voting structure to assess the true inclination of the policy committee.

  The report believes some hawkish dots may come from non-voting regional Fed presidents, making a July hike unlikely, but hawkish remarks still reinforce the view of a prolonged period of high rates.

• Growth TrackingGDP tracking

  Dynamically update quarterly GDP forecasts based on consumption, investment, trade, and historical data revisions.

  Although domestic demand data were strong, the Q1 GDP revision and a wider goods trade deficit in May led Nomura to lower its Q2 GDP tracking estimate to 2.4%.

Asset mapping & comparison

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

• US rates/US Treasuries

  Most directly affected by Fed policy expectations, inflation stickiness, and growth resilience.

  Strengths

  Resilient economic data and elevated core inflation support rates staying higher for longer.

  Weaknesses

  The lack of a clear acceleration in trimmed mean PCE, lower oil prices, and fading tariff effects reduce the need for a near-term hike.

  Comparison

  The report believes the probability of a July hike is limited, but the policy path is more hawkish than market rate-cut expectations.

  Risks

  If the Fed falls behind the inflation curve, it may later be forced into rapid hikes and trigger a repricing of yields.

• US dollar

  Indirectly supported through rate differentials and expectations that the Fed stays on hold for longer.

  Strengths

  Relatively solid US growth and elevated rates may support the dollar.

  Weaknesses

  If inflation pressures ease or the market reprices toward rate cuts, support for the dollar may weaken.

  Comparison

  The report does not directly provide a trading recommendation on the dollar.

  Risks

  Political pressure, damage to policy credibility, or changes in global risk appetite may cause volatility.

• Crude oil and energy prices

  Middle East developments and changes in oil prices are key watchpoints for the inflation outlook and Warsh’s remarks.

  Strengths

  Lower oil prices can reduce headline inflation and strengthen the case for Fed patience.

  Weaknesses

  Higher energy prices would lift inflation and affect consumer confidence.

  Comparison

  Because the US has a smaller energy consumption share and domestic energy production, it has relatively greater cushioning against oil price shocks caused by the Iran war.

  Risks

  An escalation in geopolitical conflict could tighten financial conditions, worsen the fiscal outlook, and drive second-round commodity inflation.

• US equities and AI-related assets

  The spread of corporate investment, AI supply constraints, and valuation risks jointly affect the equity market.

  Strengths

  Durable goods and core capital goods orders show that corporate investment is not concentrated only in AI, and growth momentum remains intact.

  Weaknesses

  Core inflation and a high-rate environment may pressure valuations.

  Comparison

  The report emphasizes that corporate investment is expanding beyond AI, but it still warns about a reversal of the AI boom.

  Risks

  A collapse of the AI boom could trigger a sharp correction in asset valuations; shortages of memory chips and supply chain disruptions could create new price pressures.

• BKR.US, ESNT.US

  Stock tickers captured by pipeline entity recognition, but the report text does not develop company-specific investment views around these names.

  Comparison

  No stock ratings, target prices, or earnings forecasts.

  Risks

  This macro weekly should not be interpreted as a direct recommendation on the related stocks.

Key data

• June nonfarm payroll forecast70kBelow the market consensus of 135k and also below the prior reading of 172k, mainly due to the fading of temporary job-support factors seen in May.
• June unemployment rate forecast4.3%Expected to remain unchanged after rounding; the report expects the year-end unemployment rate to fall to 4.1%.
• June average hourly earnings forecast0.2% MoMAffected by negative calendar effects and a mild cooling in alternative wage indicators.
• May core PCE inflation0.320% MoM, 3.412% YoYAcceleration was driven by services components, while core goods PCE turned negative MoM.
• May trimmed mean PCE0.23% MoM, 2.41% YoYOnly a modest rise versus April, with still about a 100bp YoY gap versus core PCE.
• Impact of BEA methodological adjustmentMay lower core PCE YoY by 20-30bpThe adjustment will take effect on 2026-09-30 with the annual revision to the national accounts and has not yet been incorporated into Nomura’s official inflation forecast.
• May personal consumptionNominal 0.7% MoM, real 0.3% MoMShows consumption remained resilient despite rising gasoline prices and uncertainty from the Iran war.
• May durable goods orders ex transportation1.3% MoMAbove both Nomura and market consensus expectations of 0.6%, pointing to broad-based strengthening in corporate investment.
• Q2 GDP tracking2.4% seasonally adjusted annualized QoQLowered from 2.6% last week; real final sales to private domestic purchasers remained at 2.8%.
• Fed rate viewUnchanged through end-2027Nomura maintains its forecast of no change in the federal funds rate.
• 2026 Q4 core PCE forecastAbout 3.3% YoYThe report believes core inflation will still be clearly above the Fed’s 2% target.

Impact & implications

For market implications, the report supports the macro combination of 'growth has not stalled, inflation has not reached target, and policy keeps rates higher for longer.' Slower employment by itself reduces the need for an immediate rate hike, but services inflation, wage stickiness, and hawkish Fed communication limit the room for rate cuts. Falling oil prices and fading tariff effects help ease some inflation pressure, but AI-related supply constraints, energy shocks, and sticky services inflation could still leave policy risks tilted 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 reverses, it could lead to a sharp correction in asset valuations.
• Memory chip shortages and supply chain disruptions caused by the Iran war could trigger a second round of goods price increases.
• Sticky services inflation and wage growth could keep core inflation above the Fed’s target.
• If the Fed responds too slowly to inflation pressures, it may later need to hike faster to rebuild credibility.

What to watch

• June nonfarm payrolls, private employment, unemployment rate, average hourly earnings, and average weekly hours.
• How Warsh describes the Middle East situation, energy prices, and the labor market at the Sintra forum.
• Whether core PCE, trimmed mean PCE, and the gap between core PCE and core CPI continue to widen or narrow.
• The actual impact of the BEA’s 2026-09-30 methodological adjustment on core PCE inflation.
• Whether FOMC officials’ remarks remain hawkish, especially comments related to services inflation and the dot plot.
• Data in the coming week including JOLTS job openings, ISM manufacturing, auto sales, and initial/continuing jobless claims.
• Oil prices, Iran war-related uncertainty, and their transmission to inflation and consumer confidence.
• Whether Q2 GDP tracking continues to be dragged down by the trade deficit and historical revisions.