Some Fed thoughts/Long rates break out/Tariff hit to freight/Notable company comments

While many are just focused on the services component of PPI and think higher 'portfolio management' prices were the main driver (it was not), I want to remind that goods prices jumped .7% m/o/m with core goods prices higher by .4% and are rising at an annualized pace of 3.6% year to date.

As we all debate the extent of rate cuts coming our way I want to remind people that currently the terminal REAL rate the Federal Reserve has had in their dot plot for the past few years is 1%. Call that the current 'neutral rate', aka, R* even though R* doesn't really exist, Powell has said we don't know what it is until we see it and is an econometric model construct but I'm playing along here with the Fed. So, with core CPI around 3% and core PCE slightly below that, about 50 bps of cuts gets us to a 1% REAL rate.

I also want to say, the 3% terminal dot plot rate is ONLY if inflation is sustainably at 2%. To say another way, 3% is NOT the 'neutral rate' UNLESS inflation is sustainably at 2% which it clearly isn't.

In trying to quantify the impact of tariffs on the shipment of goods, Cass Freight released its July shipments index yesterday and said they fell 1.8% in seasonally adjusted terms and are lower by 6.9% y/o/y. They said, "Tariffs hit shipments harder in the most recent data, as paybacks began from demand pull-forwards earlier in the year, though goods prices are still relatively steady."

Also, "Freight volumes are experiencing one of the air pockets we've warned about in recent months. We expect more to come after a reprieve in Q3. However, tariffs are also raising vehicle prices, and heavy truck makers are reducing production. In 2H '25, NA Class 8 production is set to fall more than 25% from 1H' 25."

What less truck production will eventually mean is less capacity.