Bad inflation data from the US wiped out a promising, four-day rally with such violence that new lows for the year are looming for many assets. US inflation fell to 8.3% in August from 8.5% in July, a decline to be fair, but not the decline the market was looking for. In fact, aside from the expected moderation in food and fuel prices, there were hefty gains in goods and services as diverse as new cars and trucks, vehicle repair, dental charges and hospital services. Some optimists had been hoping for signs that inflation would soon roll over: the hope was margins would fall from their current, unsustainable levels as supply chains normalise; the strong dollar and lower inflation outside the US, especially in China, would wear down import prices; rent inflation would follow the sharp drop in house prices and rents downwards, and a gradual moderation in wage gains would reduce inflation across an array of services that are sensitive to labour costs. While few doubt the logic of this reasoning, which applies both in the US and elsewhere, the inflation figures pushed out the date that this normalisation will commence. In the short-term, meanwhile, any chance of a 0.5% hike at this week’s Federal Reserve meeting has gone.

The S&P 500 had its worst day since the depths of the pandemic, falling by 4.3%. The impact on stock markets was even worse than Fed Chairman Powell’s infamous speech of two weeks ago, which set the current downtrend running. Investors even started to price-in the possibility that the Fed could raise rates by a full percentage point at its meeting this week, which would represent the highest increase in borrowing costs since 1984. The sell-off was particularly costly for Apple, the world’s most valuable company, which lost $154bn in market value, the sixth worst loss of market value in a single day in US stock market history. Apple’s one-day loss was more than the entire market value of about 90% of companies in the S&P 500 index.

Markets had still not recovered their poise when they were rocked by a profit warning from package delivery company Fedex Corp. The profit shortfall was one of the biggest setbacks in the company’s history: despite maintaining revenues at or around the expectations of analysts, profit missed analysts’ expectations by a third. That was enough to send Fedex shares down over 20%, their worst daily performance in four decades, but it was also enough to spook markets generally, given Fedex’s sensitivity to global business activity. The company’s management pointed to particular weakness in Asia and Europe, and warned that conditions could deteriorate further. Whereas investors’ concerns had hitherto largely been directed towards consumer spending (since Walmart’s first profit warning in May), the Fedex news now transmits those concerns to business spending.

As has been the case since the start of the year, the US dollar benefited from the rout in risky assets, surging by nearly 2% on average against other major currencies. These included the pound, which subsequently fell to its lowest level against the dollar since 1985. The fact that this occurred on the 30th anniversary of “Black Wednesday,” when the UK crashed out of the European Exchange Rate Mechanism, was not lost on market commentators. 

In what may be a sign of things to come, it was reported the German government is in talks to nationalise the utility company Uniper. The firm, which owns energy assets in Europe and Russia, had already seen its market value eroded from EUR16 billion down to EUR1.4 billion. The German government is also rumoured to have set its sights on other companies within the energy sector.

Amazon was hit with another anti-monopoly lawsuit, this time from the state of California, which alleges that “Amazon coerces merchants into agreements that keep prices artificially high”, such as by preventing them offering lower prices on other e-commerce websites. The company recently paid a fine in Washington state for illegal price-fixing with third-party sellers, and is being investigated by the US Federal Trade Commission on several counts, including for its acquisition activity.

Shares in Starbucks enjoyed a robust week, rising by 2.5% despite the difficult market conditions. The shares are now up over 30% since their trough in May, as consumers prioritise their caffeine habit over other forms of spending. Last week the company announced a three-year plan in which it upgraded its outlook for revenues and profit, and now expects organic growth of 7-9% per annum versus its prior forecast of 4-5%.

European fund managers may be facing a mass downgrade of their environmental fund ratings after a study found that many had not adhered to EU guidelines that came in 18 months ago. The new ratings will reflect that fact that most funds are not purely seeking out sustainable investments, despite having a top ESG rating. Fund managers have complained that they do not have enough data to comply with the new regulations, and that the regulations are continually being tweaked. 

• Unexpectedly big increases in a broad array of goods and services, including vehicle repair, tobacco, new vehicles, household furnishings and supplies, dental charges and hospital services slowed the decline in US inflation to 8.3% in August from 8.5% in July. Forecasters had expected a steeper decline. Rents continued to rise rapidly.
• UK inflation fell to 9.9% in August, from 10.1% in July. A sharp decline in motor fuel CPI inflation to 32.1% in August, from 43.7% in July, was the main cause of its first monthly decline since September 2021. Slower fuel price increases more than offset a further rise in food inflation, which was linked to sharp increases in producer and import prices. Inflation now looks set to drop sharply next year, thanks partly to the government’s new energy price cap. 

• The US Federal Reserve is expected to raise rates by 0.75%, and to signal that a further hefty increase will follow in November. There will be a great deal of focus on the so-called “dot-plot”, a chart that reveals the forward-looking expectations of the Fed’s own rate-setting committee, which is widely expected to rise significantly.
• The Bank of England is expected to raise rates by another 0.5% at its meeting on Thursday, though it is a close call between 0.5% and the 0.75% that would match the Federal Reserve and the European Central Bank.
• Business activity surveys for early September are expected to show meaningful decelerations in the UK and EU, whereas the US may have feared somewhat better.