LARRY KUDLOW: Has Goldilocks returned?

New data point to renewed “Goldilocks” conditions: wholesale prices fell with the PPI declining 0.3% in June (after +1.1% in April and 0.6% in May) alongside a deflationary CPI report. Real average hourly earnings rose 0.8% in June (best real wage gain in 11 years), while 2-year CPI break-evens dropped to 1.89% below the Fed’s 2% target—supporting the view that rate hikes are effectively pushed off the table for the rest of the year. The article also notes easing inflation expectations despite rising Iran tensions, with a strong dollar and soft precious metals.

Analysis

This is more a duration and multiple story than a clean inflation victory lap. If the market believes the disinflation trend is real, the first-order winners are front-end rate-sensitive assets and long-duration equities: TLT, IWM, and the highest-valuation parts of QQQ should get the sharpest mechanical repricing over days to weeks. The key is not the print itself but whether it changes the terminal-rate path; that is where 20-50 bps of yield compression can matter more than any single earnings revision.

On the consumer side, the better setup is for names with discretionary mix and inventory leverage, not pure defensives. TGT should benefit if real wages are improving and gasoline stays subdued, but the second-order effect is that competitors can pass through lower input costs faster, which caps margin expansion. That means the trade is about traffic and basket support, not a clean gross-margin windfall.

The contrarian risk is that softer inflation plus a strong dollar and softer oil may be signaling slower nominal demand, not a benign Goldilocks regime. The falsifiers are a re-acceleration in the next core inflation print, a WTI spike from geopolitics, or a reversal in 2-year breakevens back above roughly 2.1%-2.2%. If that happens, the market will quickly rotate back into energy and defensives and out of cyclicals and duration.

Key Decisions for Investors

• Go long TLT for a 1-3 month duration rally; best entry is on any post-data pullback. Risk/reward is attractive if 2Y yields keep drifting lower, but cut if the next core PCE/CPI print re-accelerates or the 10Y yield breaks back above recent resistance.
• Buy IWM vs SPY as a tactical 4-8 week pair: small caps have more embedded refinancing and funding sensitivity, so they should outperform if the Fed cuts are pulled forward. Falsify the trade if credit spreads widen or the next payroll report weakens materially.
• Buy TGT on weakness for a 1-2 month trade rather than a structural overweight. The upside is traffic and basket support from real wage gains; the risk is margin pass-through by competitors. Use a relative stop if WMT starts taking share or if management commentary turns promotional.
• Avoid outright shorting XLE until WTI confirms a lower-high pattern; if you want expression, use put spreads or a small tactical underweight. Geopolitical supply risk can squeeze energy higher in days, so the short should be treated as a trading hedge, not a core position.
• If breakevens keep grinding below 2.0%, add QQQ duration exposure on dips; if they rebound above 2.2%, reduce growth exposure quickly. This is the cleanest market-level tell for whether the disinflation move is durable or just a one-print head fake.