Daiwa Says July CPI Keeps Fed on Hold, Flags Housing Trend
0h ago|4 min read2Standard
Fazen Markets Editorial Desk
Collective editorial team · methodology
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Daiwa Capital Markets said the July Consumer Price Index report likely allows the Federal Reserve to hold interest rates steady at its September meeting, according to a note published on August 12. The bank highlighted a continued easing in the annual inflation trend, with headline CPI slowing to 3.4% year-over-year and core inflation falling to 2.5%, its lowest level since March 2021. Daiwa framed two consecutive subdued prints as evidence that price pressures tied to the Iran conflict are fading, though it stressed that underlying inflation remains significantly above the Fed's 2% target. The analysis drew a sharp distinction between still-hot components like medical care and airline fares and the more favorable trend in housing, which carries the heaviest weight within core services.
The Federal Open Market Committee next meets on September 15-16 to decide whether to adjust the federal funds rate, currently at 5.25-5.50%. The July CPI report represents the second consecutive month of subdued price pressures after a period of elevated inflation linked to geopolitical tensions following the Iran conflict earlier this year. The last time core inflation reached 2.5% was in March 2021, before the post-pandemic surge that peaked at 6.6% in September 2022.
Current macroeconomic conditions show mixed signals. The unemployment rate remains near historic lows at 4.3%, while GDP growth has moderated from the rapid pace of 2025. Treasury yields have retreated from recent highs, with the 10-year note trading around 4.1% as of 00:05 UTC today. The S&P 500 has gained approximately 8% year-to-date, reflecting continued investor confidence despite inflation concerns.
The catalyst for Daiwa's analysis stems from the specific composition of the July inflation data rather than simply the headline numbers. The bank identified a meaningful divergence between components that continue to show firm price pressure and those tracking closer to pre-pandemic norms, particularly within the services sector.
The July Consumer Price Index increased 0.1% month-over-month, matching the median forecast from economists surveyed by Bloomberg. This followed a 0.4% decline in June. Core CPI, which excludes food and energy, advanced 0.2% after effectively rounding to no change the prior month.
On an annual basis, headline inflation eased to 3.4% from 3.5% in June when calculated without rounding conventions. Core inflation slowed to 2.5% year-over-year, representing its softest pace since March 2021. The core services category rose 0.2% monthly after showing no change in June.
Within the components, medical care services increased 0.6% for the month, while airline fares jumped 2.2%. Both rent of primary residence and owners' equivalent rent increased 0.3% monthly, maintaining their 12-month trends consistent with pre-pandemic patterns. The Target Corporation stock (TGT) traded at $154.00 as of 00:05 UTC today, representing a 1.30% daily gain within a range of $150.32 to $154.12.
| Metric | July Result | June Result |
|---|---|---|
| Headline CPI MoM | +0.1% | -0.4% |
| Core CPI MoM | +0.2% | 0.0% (rounded) |
| Headline CPI YoY | 3.4% | 3.5% |
| Core CPI YoY | 2.5% | 2.6% |
The divergence between housing components and other services categories carries significant implications for Fed policy. Housing represents approximately 35% of core CPI and has shown consistent moderation toward pre-pandemic trends, while categories like medical care and transportation continue to exhibit volatility. This split suggests that the path to sustained 2% inflation may be uneven across sectors.
Retail stocks including TGT may benefit from the interpretation that inflationary pressures are easing without significant economic deterioration. Consumer discretionary sectors typically outperform when inflation moderates while employment remains strong. Conversely, financial sectors reliant on higher interest margins might face pressure if the Fed maintains its pause rather than continuing rate hikes.
Acknowledging limitations, Daiwa explicitly noted that underlying inflation remains well above the Fed's target and that August data could alter the outlook. The bank's analysis represents one interpretation among varying Wall Street perspectives, with some firms maintaining a more hawkish stance on future rate increases.
Positioning flows show institutional investors reducing inflation hedges while increasing exposure to rate-sensitive growth stocks. Money market funds continue to attract significant assets as investors await clearer signals on the terminal rate for this cycle.
The August CPI report, scheduled for release on September 10, will provide the final inflation data before the September 15-16 FOMC meeting. The August employment report, due September 5, will also factor heavily into the Fed's decision-making process.
Key levels to watch include whether core inflation remains below 2.6% annually and whether housing components continue their moderation trend. The Fed will particularly monitor whether the 12-month trend for owners' equivalent rent remains consistent with pre-pandemic norms around 3-4% annual increases.
Should August data show continued disinflation, particularly in non-housing services components, the case for maintaining current rates strengthens. If either inflation or employment data surprises to the upside, the Fed may reconsider additional tightening measures.
The July CPI data suggests mortgage rates may stabilize near current levels if the Fed maintains its pause in September. Average 30-year fixed mortgage rates currently stand at approximately 6.8%, down from peaks above 7.5% in 2025. However, rates remain sensitive to incoming data, particularly the August employment and inflation reports due in early September.
Headline inflation at 3.4% remains above the pre-pandemic average of approximately 2.1% observed between 2015-2019. Core inflation at 2.5% is also elevated compared to the 2.2% average during that period. The housing component specifically has returned to trends consistent with pre-pandemic norms, while other services categories remain more volatile.
Medical care services and airline fares continue to show firm price pressure, with monthly increases of 0.6% and 2.2% respectively in July. These categories have proven more resistant to disinflationary pressures than goods or housing components. Their persistence contributes to core inflation remaining above the Fed's 2% target despite improvement in other areas.
July's inflation data supports a Fed pause in September but doesn't yet guarantee sustained return to target.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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