The Cost of Transporting Pretty Much Everything Just Won’t Stop Going Up Trucking and cargo-shipping rates are at their highest levels in years—and it isn’t just because of the price of fuel

(…) Among the key drivers is the soaring price of diesel fuel. It hit a record of $6.53 on Sept. 22, according to AAA.

Also contributing to the rise in trucking costs, companies say, is a shortage of truck drivers, a byproduct of the Trump administration’s tightened enforcement of rules on who can qualify for a commercial driver’s license. Tens of thousands of immigrants—often the ones most willing to handle the less popular long-haul trucking routes—have lost their certifications.

Container-shipping rates, meanwhile, are up. The Port of Los Angeles, America’s biggest import hub, handled a record number of containers in the June-to-August stretch, in large part because retailers were rushing in ​goods to avoid new tariffs.

There’s virtually no way for businesses to avoid paying higher freight costs these days. Railroads, parcel-delivery companies like FedEx, and even the U.S. Postal Service are also raising prices. (…)

The rise in transportation costs is likely to bleed through to virtually all corners of the U.S. economy, from food to clothing to construction materials. Refrigerated groceries and other perishable goods typically feel the squeeze faster than other products, as their deliveries can’t be delayed for long. Eventually other businesses are likely to feel the bite too. (…)

The U.S. Transportation Department says it has removed more than 28,000 truck drivers from the road for failing English-proficiency tests since early 2025. It has also pushed states to cancel over 30,000 commercial driving licenses illegally issued to foreign drivers and purged over 8,000 unqualified training schools from the federal motor carrier registry. There are around 3.5 million truck drivers in the country. (…)

“The cost of recruiting, advertising, onboarding, training, sign-on bonuses—help me if I’m missing one of them, we’re going to see about $25 million more in Q3 versus Q2,” said Delco at a Morgan Stanley investor conference. J.B. Hunt also faces at least a $10 million headwind sequentially from the rapid rise in fuel prices.

“We have seen some of the most radical and abnormal swings in fuel prices that we’ve ever seen,” said Delco. (…)

Customers moving products by truck paid an average contract rate of $3.11 a mile to move their goods in August, up 29% from a year ago and the highest since August 2022, according to data from DAT Freight & Analytics. That includes the cost of fuel surcharges that come on top of the contract rate. 

A driver who drives 500 miles a day, six days a week would have paid $15,000 more in diesel since the war in Iran started, said DAT’s principal analyst Dean Croke. (…)

Existing customers of railroads—including chemical companies, manufacturers and agricultural producers—are facing higher bills. Farmers shipping grain paid a 48-cent fuel surcharge per mile per railcar in mid-September, more than double the 19-cent surcharge from a year earlier, according to data from the U.S. Department of Agriculture. (…)

The cost of shipping a ground-parcel package increased 5.2% on average in the third quarter compared with the same period a year earlier, according to data from AFS Logistics. (…)

• Apollo’s Slok Says Fed Risks Overlooking Diesel-Price Danger

Apollo Global Management Inc.’s Torsten Slok warned that record diesel prices pose a greater inflation threat than the Federal Reserve may appreciate because those fuel costs flow into the core consumer price index.

The breadth of diesel-related transportation expenses is different from gasoline’s, said Slok, Apollo’s chief economist. Demand is highly inelastic because shipping goods is vital for everything from retail supply chains to building out data centers, so price hikes will ultimately be passed on to businesses and consumers, he said.

(…) the traditional focus on core inflation — which excludes food and energy prices — doesn’t work with a fuel as crucial as diesel. “The rise in diesel prices does not stay in the energy line of the CPI but migrates with a lag into core goods and services, which is exactly the kind of pass-through the Fed cannot dismiss as transitory,” Slok wrote. (…)

Minutes from the July Federal Open Market Committee meeting showed that most participants believed that “earlier energy price increases” would wane, helping mute inflation over the rest of the year. But this week, in the wake of the Fed’s Sept. 16 rate hike, Chicago Fed President Austan Goolsbee warned the central bank cannot ignore repeated and persistent supply shocks. “Once supply shocks to inflation become persistent, some of the logic behind ‘looking through’ no longer holds,” he said. (…)

Slok identified the spending boom in artificial intelligence as the primary reason the economy has remained resilient despite higher interest rates, estimating that AI-related activity is currently adding roughly one percentage point to GDP growth. That accounts for about half of total growth at the moment, through data-center construction, energy demand, software spending and the wealth effect of elevated equity prices, he said.

He described a scenario in which the Fed’s implicit hope is that a resolution to the Iran war eases energy price pressure, relieving the central bank of the need to hike further. That outcome, he said, is “the Hail Mary right now.”

It gets slicker as John Dizard explained to IRA:

FYI, here’s what John told the IRA last spring:

We already have diesel prices that are going to be going up. If not hyperbolically, you know, very, very aggressively. And in the case of the Group III lubricants and even Group II lubricants that I’ve been obsessing about, we have an availability problem starting now.

(…) what was really destroyed in the Gulf, it’s not just a matter of escorting ships to the Strait of Hormuz. It’s the disruption of the productive plant. And that’s the problem.

John last week:

(…) The triviality of what’s being debated in the mainstream American media compared with the seriousness of what’s going on in the rest of the world is astounding. I’ve never seen any greater divergence. So, you know, what can you say?

Our little talk back in April about Group III base oils turned out rather interestingly. They’re on allocation now by the major suppliers. There will probably be panic buying by some people, which will make the allocation a little worse. I don’t think people ever quite realized what was going on with improving mileage for cars. Consumers thought that better mileage was for free. No, it was being bought at the cost of dependency on a type of oil that we weren’t actually making in the U.S. (…)

We’re going to be bidding against the Europeans for our synthetic oil which isn’t all synthetic, but which is definitely high viscosity. We’re going to be bidding against them because they’re not going to be getting lubricants from the Middle East and their oil refineries are not going to be supplied with crude by Saudi. (…)

The Houthi presence on the Red Sea does mean that yet more refining capacity has been knocked out. So product exports from the Saudi refinery at Jazan on the Red Sea, for example, are suspended. That’s the real choke point in the world, is not just crude supply, but it’s really product supply. And that’s one more refinery that’s crossed off the list. Did they actually destroy it? No, they didn’t destroy it. They damaged it, but they have said no Saudi ships. (…)

And for the Russian refineries, which have been knocked out, repeated attacks have an increasing effect on how long it takes to restore refinery capacity. You can fix something, and then if it gets hit again, yet more damage will be done, which will be harder to repair.

The Ukrainians have also gotten more sophisticated about which units and refineries they attack, so the fluid catalytic converters are the first thing they hit. Those take a while to fix and the Russians have responded to degradation by lowering the grades of gasoline and diesel they produce for sale. Russia is now on Euro 2, which is a grade of fuel you would buy 20 or 25 years ago. That type of fuel will do really bad things to modern engines. The Russians are facing significant problems. (…)

With Diesel, we’re close to seven bucks now. Does it get beyond that? Yeah. Is there a temptation for Washington to impose export controls for diesel? Yeah, but there are problems with that because you wind up also not being able to produce enough gasoline, because of the way refineries work. (…)

U.S. crude is not well adapted to diesel production. You need medium crude, at least, such as is produced in Canada, or heavy crude. Being able to produce a lot more Canadian oil would be good.

What’s even better than medium crude is medium sour, crude that has a lot of sulfur in it, meaning that you extract that sulfur, but then you use that sulfur to produce fertilizer, which I’ll get to in a second. The crisis in lube oil is here now. That shortage is here now. My advice to people, it’s practical advice they might need, is if you have a modern car and you need a 0W-20 oil, don’t put in a lower grade. You will wind up with problems with your engine. (…) To the degree people can’t get high viscosity oil, they’ll have problems with their bearings, pumps, generally their engines. Just don’t do it.

So anyway, back to the sulfur thing right now, what’s happened is the price of sulfur is kind of normalizing in a way around a thousand dollars a ton, which is up eight times from a year and a half ago. The problem is it can’t go up further because the fertilizer companies who buy it to make sulfuric acid can’t go higher.

About half of all sulfur produced in the world goes to sulfuric acid then most of that goes to producing phosphoric acid, which is then used to make phosphate fertilizers. So the problem is that with the price of sulfur having gone up as much as it has, farmers can’t afford more fertilizer.

They can’t afford those prices. So rather than raise prices, the fertilizer companies are simply cutting production, partly because farmers can’t afford it and partly because there’s not the physical availability of the sulfur to make it.

This is going to result in food shortages. We had a good harvest for grains this year. There were favorable crops most of the world, including, by the way, Iran, which is why they’re not going to starve to death. But that carryover will be limited. And crop yields are already declining in the US.

And next year, they’ll decline not only in the US, but around the world because farmers will not be applying as much from winter planting, spring planting on. There will be a food crisis starting next year.

Every dollar they have to pay for diesel is a dollar they can’t pay for fertilizer. And the farmers, even at higher grain prices than they have now, can’t cover their costs. They’re losing money. You know, there is no transfer payment that’s going to change that. So they’re are hurting badly.

Bankruptcies are up. Farm income is down. So there’s going to have to be a major, major increase in food prices next year. We’ll see how much of the Russian and Ukrainian crops actually manage to get to market because they can’t ship out to the Black Sea because both sides, neither side will agree on it. (…)

The food crisis is going to be the crisis of next year. I mean, it’s bad when you can’t drive as much as you feel like. It’s much worse if you don’t have the food. And it’s already baked into the cake. There a were about 75 million tons of phosphate fertilizer used in the world last year. Next year, 30 million tons of that will not be there.

Think about that and there’s a multiplier on food production when you don’t get a phosphate application or for that matter enough nitrogen fertilizer. (…)

I think that you’ll get to the price levels that destroy economic activity in the east that you have in the west. So $7-8 diesel, perhaps higher after the midterms. Maybe $7 or $8 regular gas.

At $10 diesel, you start to get projects canceled, you know, shipments canceled, you start to get real demand destruction. (…)

What’s amazed me is how poor is the response from the high end of the U.S. government. The command levels just have responded to this very badly. Why do you think the Chinese satellite images of US bases in Jordan can be seen in the rest of the world, but not in the US? That’s not for security reasons. That’s for PR reasons.

The Trump Administration does not want US media to report how badly the US bases were hit. And by no coincidence, JPMorgan suspended issuing its estimate of oil prices for next year.

• Modeling Potential US Diesel Export Restrictions (GS)

GS estimates that, “initially while storage remains available, each week of a US diesel export ban would be associated with $0.25/gallon of downward pressure on average US retail diesel prices, or just under 4% of the current $6.5/gallon.”

• the longer a diesel export ban lasts, the more disruptive it would likely be by putting upward pressure on gasoline prices because diesel, gasoline, and jet fuel are largely produced together.
• restrictions on US diesel exports would add upward pressure on ex-US diesel prices.
• post-ban global refined oil product prices would likely be higher
• Gasoline markets are tightening rapidly.
• Any future potential inclusion of gasoline in US product export restrictions would tighten ex-US gasoline markets.
• Europe’s gasoline SPR reserves are 4x smaller than its diesel reserves.

In effect, Trump would hit Europe directly after having hit it indirectly with his war on Iran.

Trump last Thursday:

This is the “HOTTEST” Economy in the World — and the Media is working overtime for the Democrats to convince Voters that the opposite is true.” He added that the economic outlook was good for working people “because it gives them more wage leverage.

The last thing the US economy, the bond market and the Fed need right now is accelerating wages. The Atlanta Fed Wage Tracker troughed at +3.5% YoY in May but reached +4.1% in August. Job switchers are getting +5.0%, highest since 2024.

Job Postings on Indeed are up 3.4% since their early June cyclical low, pointing to accelerating employment growth. The labor force is down 1.0% so far in 2026 with the participation rate slumping 1 full point to 61.6. The participation rate was 66.4 in January 2007, 63.3 just before the pandemic. Declining supply against rising demand.

The September flash PMI released last week:

• The headline flash S&P Global US PMI Composite Output Index rose from 56.0 in August to 58.4 in September, registering the fastest expansion since July 2021 and an acceleration of growth for a fourth successive month.
• New order inflows also gathered pace in both sectors, with growth reaching the highest since March 2022 in the service sector and the highest since April 2022 in manufacturing. In both cases, demand was buoyed principally by the domestic market.
• Companies’ backlogs of uncompleted orders, a key indicator of capacity utilization and future business growth, rose in September at the sharpest rate since May 2022, having accumulated at increased rates in both manufacturing and services.
• Employment consequently rose in September at a rate not seen since June 2022 and a pace rarely exceeded since comparable data were first available in 2009. Both service sector and manufacturing payrolls increased, the former at the fastest rate since June 2022 and the latter notably to the greatest extent since February 2021.
• Price pressures intensified in September. Average input costs measured across both goods and services surged higher, the overall rate of inflation hitting the highest since October 2022. The increase was blamed widely on higher fuel and transport costs, though wage pressures were also noted to have picked up in many cases. Service sector input cost [mainly wages] inflation hit the highest since November 2022.

Timely enough?

Fitch Ratings reports that the 60-day delinquency rate for U.S. subprime auto loans reached an all-time historic high of 6.9%, exceeding the peak of the 2008 financial crisis which topped out around 5%. This is the highest level recorded since Fitch started tracking the data in the early 1990s.

Credit corrections always come from the bottom up. When the economy shifts and credit tightens, defaults and financial strain almost always show up first among the lowest-rated borrowers and subprime consumers before eventually moving up to impact prime borrowers and corporate credit.  This is why people talk about a “K” shaped economy, but that K is fast becoming an L.

The delinquency rate for prime car loans has held incredibly steady at under 0.5%,suggesting that delinquency is concentrated among lower-credit borrowers. But will rising inflation and energy prices start to cause default rates for prime consumers to move higher? Will the “K shaped” distribution for consumer credit now become more lopsided as delinquency rises from the bottom of the consumer cohort? The chart below shows the Auto Indices for net loss from Fitch Ratings. (IRA)

Source: Fitch Ratings

Qatar Has a Message for the ‘Troublemakers’ and ‘Saboteurs’ Blocking Peace

Sheikh Mohammed bin Abdulrahman Al Thani, Qatar’s prime minister in conversation with Bloomberg:

(…) What’s really concerning [is] that a red line — targeting civilian facilities, schools, hospitals, bridges, power plants, energy facilities — became the new normal. It’s been deliberately crossed not only in that conflict, but elsewhere in the world. The parties who are crossing these red lines are bragging about it. There is a huge responsibility on the international community to stand up to these kind[s] of violations, otherwise we will end up in a different world.

Are you referring not only to Iran but also to the United States and Israel?

Any targeting [of] civilian facilities should be prohibited and we should stand up for this. (…)

Bring us up to date on the situation now.

The situation is deeply concerning. Qatar is not a party of this war. Iran is our neighbor. [The] US is our strategic ally. [The] Gulf is our national security coalition.

We are trying to convey messages between parties, but also need to acknowledge this conflict is very complex. Unfortunately, developments we are witnessing every day — very reactive events — are changing the course of negotiations.

There is no clear master strategy we are following. That’s basically what we are missing today. (…)

How and when do you envisage a change in the situation of the Palestinians?

In Gaza, unfortunately, we are dealing with a party who is reckless; keep[s] killing; preventing humanitarian aid from entering. The world is not doing much about it.

Do you mean the Israeli government?

Of course. It’s very clear that the commitments stated in the agreement are not fulfilled yet. We are calling for the Israeli government to fulfill their commitment.

In our world, countries are either peacemakers, troublemakers or saboteurs — or those who sit back and do nothing. All countries need to step up and to stop the saboteurs, stop the troublemakers and work together collaboratively in delivering a real peace. (…)

The Palestinian issue will never be resolved [with the] policies adopted [by] the current Israeli government. What’s happening in Gaza is one thing; the West Bank, another. We have seen violations happening [in] Lebanon, Syria, Iraq.

Is Iran a troublemaker?

With what they have created for the region as a response to the American-Israeli war, [it’s] appeared very clearly that they are not a peacemaker. (…)

Let me clarify something. When you ask Is Iran [a] troublemaker? We are talking specifically [about] the trouble Iran made for the Gulf.

(It’s interesting that the prime minister chose to come back to clarify his words on Iran: suggesting, I think, that Qatar had no problem with Iran before the events of this year. Sunni Arab countries had worked to improve ties with Tehran in recent years, but the wider backdrop was persistent concern over Iran’s nuclear ambitions and its relationships with Hezbollah, Hamas and Yemen’s Houthis.)

Iran is our neighbor. Without a security framework that brings us all together as Gulf countries with Iran — ensuring that none of us is posing a threat [to] the other — this region will not [continue] in the same way as it used to.

We have to act together responsibly as a region and make sure that we [have] good relation[s] with Iran, and Iran has a good relation[s] with the Gulf. We are working toward that; our regional partners believe in this. We are hoping this war is a wake-up call for everyone. It’s time for it to happen. (…)

The Moves That Backfired on Trump and Drove Interest Rates and Inflation Higher

In the early days of President Trump’s second term, his economic advisers laid out a simple theory: Show the bond market that Washington was serious about closing its gaping deficits, and long-term interest rates would fall on their own. Trump could leave the Federal Reserve alone. (…)

The White House theory rested on fiscal restraint that never arrived and overlooked how much of Trump’s own agenda would feed the price pressures now pushing rates higher. Tariffs raised the cost of imported goods. The war with Iran sent oil and diesel prices soaring. Immigration restrictions shrank the labor force. (…)

Bessent made deficit reduction a centerpiece of his pitch during the 2024 campaign. Then a hedge-fund manager advising Trump, he championed an agenda called 3-3-3: cutting the deficit to 3% of GDP, lift inflation-adjusted growth to 3% and increase domestic energy production by the equivalent of 3 million barrels of oil a day.

Once Trump took office, advisers trotted out a series of fixes for the deficit.

First came the Department of Government Efficiency, which Elon Musk said could find $2 trillion in savings by eliminating wasteful spending. It delivered very little. Then came tariffs, which brought in record customs revenue until the Supreme Court ruled this year that Trump lacked the authority to impose many of them.

Now the message is that strong economic growth will generate the revenues needed to reduce deficits. “We can grow our way out,” Bessent said during a television interview on Aug. 20. (…)

Bessent also said last month that a deficit-reduction plan would be unveiled within days, though he later said it wouldn’t be released for weeks or months. Trump, meanwhile, pledged this month $5,000 for every adult if Republicans keep control of the House and Senate in this fall’s election. (…)

The deficit doesn’t rank high among Trump’s priorities, if it registers at all, advisers said. These people say his main preoccupation has been Fed rate cuts, which he saw as a shortcut to shrinking the government’s interest bill. (…)

BTW, from the US Government Accountability Office, when the US debt just surpassed $40 trillion:

In FY 2025, 15 federal agencies reported a total estimate of about $186 billion in improper payments across 64 programs, an increase of $24 billion from the prior fiscal year. Most of these improper payments were a result of overpayments.

Improper payments have been a government-wide issue for more than 20 years, with estimates since FY 2003 at about $3 trillion.

Of the programs reporting improper payment estimates for fiscal year 2025, 19 reported improper payment rate estimates of at least 10 percent, including six programs whose rates exceeded 25 percent.

Improper payments—those that should not have been made or were made in incorrect amounts—have consistently been a government-wide issue. Since fiscal year 2003, cumulative improper payment estimates by executive branch agencies have totaled about $3 trillion, though the actual amount may be much higher.

Remember DOGE?

DOGE reported $110 billion in taxpayer savings — the GAO reviewed those claims and could verify exactly 4% of them. More than 22,500 contracts DOGE said were eliminated were never actually canceled. The GAO called DOGE’s numbers “not transparent” and “largely could not be verified.” The war on waste was mostly a press conference.

Even the World Cup couldn’t stop America’s tourism slide

• Despite hosting the World Cup, overseas travel to the U.S. was DOWN this summer.
• We’re on pace for overseas visitors to drop by 2 million from last year — down 20% from our ’19 peak.
• “We’re the only major country in the world losing visitation, he told me. “It’s mind-boggling.”

This is hitting the U.S. economy hard. And it’s mostly self-inflicted: longtime allies like Canada (down 23% over two years) or Germany and France (down 16% and 15% YTD, respectively) are stiffing us, largely out of protest and fear.

Freeman said that high-end and low-end travel rise and fall in tandem historically.

• But high-end is booming domestically — thanks to business travelers paying a lot more for nice hotels and perks — with the rest flat or faltering.

Broadening?

From Callum Thomas:

Stealth Correction? While the headline market cap-weighted S&P500 has just been milling about, the equal-weighted version has dropped just over -5% off the 13-Aug peak. Breadth also paints a picture of market correction, with 200-day moving average breadth dropping from the high-70’s to just below 50%.

This is a classic stealth correction, on the surface headline index level it seems calm, under the surface there’s wreckage and weakness.

MarketCharts.com

Stealth Correction — Flows: back on the idea of a stealth correction, this chart brings another angle on it. Investors have been raising cash at a similar pace to that seen during some of the previous major corrections and resets of the past decade.

So you could argue it amounts to a healthy reset (just in time for Q4 rally?)

Source:  @MacroCharts via @RyanDetrick

Equal-Weight vs Cap-Weight: with the relative weakness in the equal-weighted index, the equal vs cap weight relative performance line has made new 20+ year lows; extending the already stretched excursion from its long-term uptrend.

Source:  Topdown Charts Professional

Profit Prophets: in the background earnings expectations continue to heat up with this exhibit showing euphoric expectations for earnings margins.

But as I have mentioned before, there is such a thing as so good it’s bad, as Barclays notes: “the risk of course would be if .. growth/eps expectations for next year are unrealistically high …. every investor should take a long hard look at the ‘E’ in SPX valuations .. if they are going to buy into the ‘stocks are cheap’ narrative.”

Source:  @carlquintanilla

Did you miss The AI Boost to S&P 500 Profitability?

Relative Value Rubber Band: then you also look at the relative value rubber band chart (I call it a rubber band chart when you have two things getting stretched and that will eventually inevitable snap back when something gives).

Tech (using the wider TMT definition to recapture some of the names that got spun out of the traditional tech sector) is trading on historically elevated valuations relative to the index (using a broad suite of valuation metrics).

Meanwhile defensives [healthcare, utilities, consumer staples]; the ones that investors shun in boom times, and look to for a buffer during downturns — are as cheap as dot com on a relative value basis.

Who’s Ahead in the Global AI Talent Race?

(…) That U.S.-China competition [on AI] has been most visible at the models layer. Every few months, a leading American AI lab releases a state-of-the-art frontier model, only to be followed by a Chinese open-weight model that nips at the heels of the U.S. frontier. As one of the most complex technologies in recent memory, AI’s advancements are driven by the world’s elite AI researchers and scientists. In other words, this layer is essentially a proxy competition for talent. (…)

China has established a commanding lead as the largest originating source of elite AI talent globally. Compared to 2022, the share of Chinese-origin AI talent, defined as those who received undergraduate degrees in China, increased 11 percentage points to 57 percent in 2025, while the U.S. share fell to 13 percent.

The United States remains a magnet for global AI tal­ent, particularly Chinese talent. Despite U.S.-China tensions, among AI researchers working in the United States, the 2025 share of those holding undergraduate degrees from China rose by 4 percentage points. When it comes to brain gain vs. brain drain, the United States saw a net gain of +2,145 researchers in 2025 while China registered a net loss of -1,729 researchers.

However, more Chinese researchers are staying put in China than before. This is likely due to two factors: 1) It’s easier for Chinese graduates to find jobs in China’s booming AI industry, and 2) it’s harder for them to come to the United States as a result of tighter visa restrictions, particularly for Chinese graduate students in STEM fields. The share of Chinese-origin research­ers who end up working in China increased from 57 percent in 2022 to 69 percent in 2025.

The Robust U.S. Economy Powers Through Rate Hikes and Rising Bond Yields AI-driven growth looks resistant to higher borrowing costs, spooking Treasury investors

The U.S. economy keeps powering through inflation, tariffs and higher borrowing costs, defying a run-up in Treasury yields and a Fed rate increase. That has the bond market spooked.

The usual economic brakes aren’t slowing growth, hiring or an AI investment boom that looks to be unstoppable. To some, AI’s potential returns seem so bright that even steep interest rates won’t slow down tech companies’ investments. (…)

Treasurys are facing more competition for investors’ cash from an explosion of bonds issued by companies involved in the AI build-out. Strong economic data are also pushing up yields by stirring speculation that the Fed may have to raise rates even higher than previously expected to cool a potentially overheating economy. (…)

Reinforcing that concern, some economists worry that borrowing costs that continue to climb may do less today to slow the economy than they have in the past, potentially requiring an even bigger Fed response. The AI boom could provide kindling, as more of the benefits could ripple out to other parts of the economy, said Eric Winograd, an economist at AllianceBernstein.

“Everything that gets put into building a data center has to be built somewhere,” Winograd said. “So you get this sort of idea of a filtering through the supply chain, a filtering into other areas of the economy that would broaden the base of expansion.” (…)

On Wednesday, an often overlooked report, S&P’s purchasing-managers’ index, provided the strongest evidence yet the economy could be picking up steam, not merely holding firm.

The report was striking across the board: A gauge of manufacturing activity registered its biggest monthly increase since 2022. A reading of service-sector activity jumped to its highest level since 2021. New orders powered growth in both sectors. (…)

“One-third of U.S. households are headed by someone aged 65 or older,” Yardeni said. “These people aren’t looking for mortgages, they are just enjoying the higher investment returns they’ve been seeing.”

Higher yields don’t only reflect expectations of higher growth. The U.S. government debt burden has soared. Yields have also been closely correlated in recent weeks to oil prices, reflecting worries that higher energy costs could feed into broader inflation.

Investors don’t appear worried the Fed will lose its grip on inflation. The breakeven inflation rate—the bond market’s indicator of the inflation that investors expect—remains modest.

Instead, investors are concerned by just how much the Fed may have to raise interest rates to keep inflation in check—a question compounded by their uncertainty about how its new chairman, Kevin Warsh, will lead the institution. (…)

Predominant bets in interest-rate futures markets show expectations that the Fed may hike rates a full percentage point by the end of 2027.

If inflation is being fueled by a strong economy and not just an energy-supply shock, it could create a big challenge for the Fed, Winograd said.

If you’re the Fed, “you’re really going to have to crush everything that isn’t AI, if AI refuses to slow down,” he said.

You mean, the wealth effect, equity markets?

Greg Ip Tuesday:

An oil-price spike delivers two hits to inflation. The first is quick and obvious: As gasoline and other fuel costs jump, so does total “headline” inflation.

The second is slow and subtle. As costlier fuel works its way into other products and services, “core” inflation, which excludes food and energy, comes under upward pressure.

Those latter “second-round” effects have been largely forgotten about in recent decades because “most of those oil shocks in the last 40 years tended to be fairly short lived,” says Morgan Stanley economist Michael Gapen. For example, roughly 200 days after Russia invaded Ukraine in 2022, oil was $7 below its preinvasion price. When companies don’t expect costlier energy to persist, they don’t try as hard to raise prices.

This spike doesn’t look so short-lived. Roughly 200 days after the U.S. and Israel attacked Iran, oil is $25 above its preinvasion price. With tanker and refinery capacity curtailed, European inventories depleted and the cushion of higher U.S. exports and lower Chinese imports fading, oil prices look vulnerable to more disruptions, Morgan Stanley warns.

PepsiCo to Raise Some Prices After Cuts Failed to Grow Sales

The company is expected to increase the prices on grocery-store-sized bags of chips, including Doritos and Ruffles, which had been cut earlier this year, according to people familiar with the plans. The price increases, which will extend to other brands, including SunChips, are expected to go into effect at the end of this year or early 2027, according to the people, who asked not to be named because they are not authorized to speak publicly.

The prices of certain chips will go up by a low-to-mid single digit percentage, aligned with inflation, a spokesperson for PepsiCo said, adding that the new prices will be lower than where they were prior to the price cut earlier this year. (…)

In February, PepsiCo said it was cutting prices by as much as 15% for key chip brands in a bid to boost sales that had faltered after prices got too high, with some chips topping $7 a bag. But the company saw a 2% decline in revenue in its North American food business and flat volume in its most recent earnings in July. PepsiCo Chief Executive Officer Ramon Laguarta said the consumer was under more strain than expected, due to higher gas prices.

PepsiCo is also raising prices this week on some dips, including extra-large and extra-extra large jars of Tostitos salsa and Fritos canned dips, according to a memo viewed by Bloomberg News. At Dollar General stores, the extra-large Tostitos salsa jars are now priced at $4, up from $3.80, while the extra-extra large jars are now $5.50, up from $4.95. The Fritos canned dips increased to $3.75 from $3.30.

The company is additionally expected to increase prices on some sodas and has warned some retailers of the upcoming price hikes, according to people familiar with the matter. (…)

Other food companies, including Campbell’s Co. and Conagra Brands Inc., have said they are raising prices in the face of a sustained increase in energy and fertilizer costs, as well as tariffs on imports. (…)

EARNINGS WATCH

Analysts Snap Longest Run of US Earnings Upgrades in Five Years

Equity analysts have turned net negative on the outlook for US corporate earnings for the first time in months, reflecting concerns about the effect on profits of inflation and higher interest rates.

More analysts have cut rather than raised their earnings estimates for the first time in 23 weeks, ending what had been the longest run of upgrades since September 2021, according to a Citigroup Inc. index.

“The main drivers of the weakness come from consumers, both staples and discretionaries, materials and financials,” said Stephan Kemper, chief investment officer at BNP Paribas Wealth Management Germany. “I think those revisions can be directly linked to a combination of higher living costs and rising energy prices.” (…)

• Costco’s Quarterly Profit Beats Estimates on Tariff Refunds

The big-box retailer reported earnings of $6.75 per share, excluding some items, in the quarter ended Aug. 30, higher than the average of analyst estimates compiled by Bloomberg. Tariff refunds added 15 cents of earnings per share. (…)

The company got $184 million of tariff refunds in the last quarter and has received roughly the same amount for the ongoing period, executives said. The company has primarily used the proceeds to cut prices of products like meat, produce, beverages and home furnishings.

Adjusted comparable sales rose 6.7% for the quarter, better than expectations. (…)

The cheap new AI model taking aim at OpenAI and Anthropic Start-up TypeSafe AI’s ‘Jev’ model promises faster, more efficient AI for developers

A Silicon Valley start-up that released its first product just last week is drawing investment offers at a multibillion-dollar valuation, with promises that its AI tools are more efficient than OpenAI and Anthropic’s.

Founded by former OpenAI researcher Diogo Almeida, TypeSafe AI is pitching its “decision model” Jev as a cheaper alternative to the large language models that power ChatGPT and Claude, for certain tasks.

Jev, aimed almost exclusively at software developers, has drawn intense interest in the tech industry and gone viral on social media since TypeSafe emerged from so-called stealth mode last week. Its launch video on X generated 40mn views in less than a week. (…)

TypeSafe is betting that many routine tasks now handed to expensive general-purpose models can instead be performed by cheaper, more specialised systems. If the idea gains traction, it could put pressure on the business models of frontier AI companies such as OpenAI and Anthropic. (…)

TypeSafe’s pitch is that LLMs, designed for interacting with human beings, are ill-suited for the sort of programmatic, repetitive and high-volume tasks many global businesses are trying to automate using AI. (…)

Jev does not produce sentences, explanations or images, but instead promises fast, cheap decisions within software applications. The “classifying” tasks it can be used for include, for example, deciding whether to approve, block or review a request, routing a support ticket or underwriting insurance or credit risk. 

The model is designed for developers to build into the back end of their software, and does not have a consumer-facing interface. (…)

The name Jev is a reference to Jevons paradox, the economic observation that making a resource cheaper or more efficient can ultimately increase its total consumption as new uses emerge. While large language models churn through long chains of reasoning that can consume a lot of computing power, TypeSafe says their model quickly selects from a limited range of possible answers based on a probability calculation. (…)

This in turn brings down the number of “tokens” it burns, reducing the cost.

The company claims each query is about a hundred times cheaper and faster to process than LLMs, charging around 4.2 cents per million tokens compared with LLMs that can cost several dollars per million. (…)

Andrej Karpathy, an OpenAI co-founder recently hired by Anthropic, wrote on X that Jev appeared to have tapped into “latent demand” for models that provide simple, cheap and fast decisions, in an area that has been “underinvested into because of a race to higher intelligence” by the frontier AI model companies.  (…)

The AI Build-Out Is Becoming the Biggest Economic Bet in U.S. History

WSJ (via Ritholtz)

Trump’s Fight With the White House Press

(…) the White House press office issued letters to the three outlets, dated Tuesday, accusing them of “trafficking in verifiable falsehoods” and “publishing sensitive or classified information.” One specific article cited was a Politico piece from June, quoting a “senior administration official” pegging the odds of a peace deal with Iran at 80% to 85%.

According to media reports, that unnamed source was Vice President JD Vance. And this wasn’t a leak but an authorized briefing, the Washington Post explains.

“Thank you for joining this press call,” an aide began. “The contents of this call are on background, attributable to a senior administration official.” Oops. Other news outlets, such as the Associated Press, also reported the 80% to 85% estimate. (…)

So, a White House press aide explicitly instructed the attending journalists that the contents of the call were “on background, attributable to a senior administration official,” meaning reporters were barred from using Vance’s actual name.

Despite the call being fully authorized and arranged by the administration, the WH cited the resulting June 12 Politico article as a “threat to national security” and an example of “spreading misinformation” to justify revoking Politico‘s press credentials.

Trump on June 14:

This Great Deal will bring Peace and Security to the whole Region. Many presidents have tried to make Peace with Iran, and all have failed before me. The Leaders of the Region have, for the first time, found a President who can help them achieve real Peace.

Oh, BTW, the price of oil, which closed at $87.71 on June 11, dropped 3.2% to $84.88 on June 12, before sliding further to $76.05 on June 16 all the way down to $68.69 on July 2.

The “Great Deal” collapsed when Trump ended the ceasefire on July 8.

Today, that “Great Deal” could be back, but only in phases (!):

US, Iran Said to Be Exploring Phased Deal to Open Hormuz

US and Iranian negotiators are exploring a phased deal that would see Tehran reopen the Strait of Hormuz and Washington lift its blockade of Iranian ports, according to a person familiar with the discussions.

The two countries — which have both refused to make similar agreements in recent months — were making a push for a breakthrough Thursday on the sidelines of the United Nations General Assembly, the person said, declining to be named discussing private matters. Qatari officials are mediating the negotiations.

A sequenced deal would be similar to the memorandum of understanding that the US and Iran struck in mid-June, which led to a fragile ceasefire that collapsed just weeks later. (…)

Araghchi represented Tehran in the talks and outlined its “firm positions” on reopening Hormuz, according to Iranian state media. Those conditions include the US immediately lifting a naval blockade, unfreezing Iranian assets and ending the war “on all fronts,” according to Iranian reports, an apparent reference to Israel’s campaign against Iran-backed Hezbollah militants in Lebanon.

“We have not closed the Strait of Hormuz,” Pezeshkian said in an interview with Fox News broadcast Thursday evening. “It was open without any legal justification or framework. They attacked us.”

Trump told reporters on Tuesday that US and Iranian officials had spoken in New York amid the flurry of UN meetings. His comments lifted stocks and pushed down oil prices.

The American president has repeatedly said the US and Iran were close to a deal with no results. He’s also threatened Tehran with military escalation multiple times — including a threat to “annihilate” the country earlier this week — without following through. (…)

In the FT:

The Trump administration has said it will not return to the MoU, which was condemned by both Republicans and Democrats, and is instead pushing for a more comprehensive agreement that will cover not only the strait but Tehran’s nuclear programme, according to people familiar with the talks. (…)

Both sides said the conversation was productive, but the Iranians privately said they were not optimistic that the US would stick to any agreement. (…)

Pomp prevails over substance as Donald Trump hosts Xi Jinping

(…) The only news was Xi announcing that China would soon send two giant pandas — named Ping Ping and Fu Shuang — to the Atlanta Zoo, in an example of longstanding panda diplomacy that briefly suffered during the Biden administration when US-China relations plummeted to a four-decade low. (…)

Trump and Xi had a one-on-one meeting before being joined by advisers.

The US president appeared to shorten the meeting to make time to show Xi around the White House, including a tour of his Marine One helicopter and helipad. He also pointed out his new ballroom, which was not finished on time to host the dinner. (…)

At the dinner, Trump presented Xi with a statue of a bald eagle. In his toast, he touted his ballroom again, saying it could host 1,000 people when completed. (…)

“Together, let us write a new chapter in our friendly relations,” said Xi, who was wearing a Mao-era suit for the occasion.

While the outcome of the summit may become clearer on Friday after they spend a final morning together, one of Trump’s biggest accomplishments on Thursday was getting his Chinese guest to laugh. (…)

“For Beijing, the real deliverable of this summit will not be on a factsheet, it is the photos showing the unprecedented pomp and circumstance,” she said.

“There is a real imbalance between the paucity of forward movement on issues the US cares about and the pomp and circumstance . . . Functioning channels of communication between the leaders is a good thing, but this summit mismatch is a lost opportunity for Washington.” (…)