Goodwin: 0.3% inflation now could mean 3.5% by year-end

Key Concepts

• CPI (Consumer Price Index) and Inflation
• Goods Prices vs. Services Prices
• Tariff Pressures and Transitory Inflation
• PMI (Purchasing Managers' Index)
• Federal Reserve (The Fed) and Interest Rate Cuts
• Defensive Trades (Staples)
• US-China Trade Relations and Tariffs
• Corporate Buybacks
• Black Swan Events

1. CPI Data and Inflation

• The CPI data is crucial for understanding inflation trends.
• A 0.3% month-on-month inflation rate, if sustained, would lead to a 3.5% core inflation rate by year-end.
• The gap between goods and services prices is a key indicator.
• Rising services prices, as indicated by PMI data, are a concern.

2. Goods vs. Services Inflation

• The market has been more tolerant of rising goods prices, attributing them to potentially transitory tariff pressures.
• Services inflation is viewed differently, as it's not directly linked to tariffs.
• "If we see some stickiness in those services prices, I believe the market would react negatively to that, anticipating that it might impact the way the fed thinks about interest rate cuts moving later into the year."
• Persistent services inflation could negatively impact market sentiment and Fed policy expectations.

3. Market Sentiment and Defensive Trades

• Money flowing into staples (a defensive trade) suggests some market skittishness.
• Uncertainty surrounding new tariff measures and concerns about all-time highs not pricing in risks contribute to this sentiment.
• The market has been taking a "half step back" from daily trade news, anticipating a more significant impact in Q4 data.
• While not bearish, there's caution about equity risk given current valuations.

4. US-China Trade Relations and Tariffs

• The extension of temporary tariff reductions between the US and China until mid-November is good news in the near term.
• However, the broader trend of US-China competition related to economic and national security is expected to continue.
• "I anticipate over the next year or so that the average effective tariff rate on goods coming from China is moving higher, regardless of what the ebb and flow looks like here in the near term."
• The average effective tariff rate on goods from China is expected to increase over the next year.

5. Corporate Buybacks

• Corporate buybacks, potentially exceeding $1 trillion in 2025, are seen as an underpinning of the market.
• A slowdown in buybacks could negatively impact the S&P and Nasdaq, especially given the involvement of big banks and tech companies.
• Limits on buybacks are considered a potential "Black Swan" event that could disrupt the market.

6. Black Swan Report

• The Black Swans report identifies potential disruptive events.
• Limits on buybacks is one of the potential events.

7. Conclusion

The market is currently navigating a complex landscape of inflation data, trade tensions, and corporate actions. While the extension of tariff reductions provides short-term relief, concerns about services inflation and the long-term trend of US-China competition remain. Corporate buybacks are a significant factor supporting market momentum, but potential limits on buybacks represent a risk. Investors should be cautious about equity risk given current valuations and be aware of potential "Black Swan" events.