Until early yesterday afternoon, most of us thought, or hoped, that inflation was behind us and that we'd passed the peak. But US inflation did not continue to ease between July and August. In fact, it accelerated again in some ways.

The dominant scenario for the past few weeks had been that the battle against inflation, with its many rate hikes, was more or less won. It allowed us to project the moment when the US central bank would become more flexible again. Hence the recent renewed appetite for risky assets.

This is why yesterday's announcement was so damaging. The drop in oil prices should have allowed general inflation to fall slightly between July and August. But it did rise, albeit slightly. Core inflation (excluding energy and food) was expected to rise, but it did twice as expected, bringing its year-on-year rise to 6.3%. Specialists note that price increases are becoming embedded in all segments of the economy, which should lead the Fed to maintain a very offensive speech on raising its rates. The other Western central banks will not escape this either.

Yesterday, the Nasdaq 100 plunged 5.5% and the S&P 500 tumbled 4.3%, for its worst session in over two years. US indexes lost almost all the benefit of the rebound phase that started last week. This obviously dampens the mood, because we need to reintroduce more caution into the scenarios.

This reminds me of a note sent by an analyst firm at the end of August, which recommended that its clients should not be too optimistic about inflation for the time being. Basically, the message was "beware, the key markets that determine inflation remain inflationary". In this case, it is commodities including energy, the labor market with unemployment rates still at the bottom and housing, whose prices are currently only bent in relation to the bubble levels reached previously. Perhaps we need to pay more attention to the combination of these three elements. The Fed seems to be doing so in any case.

Meanwhile, US producer prices – published today - fell 0.1% in August, matching estimates. In addition, new figures show a surprise fall in British consumer prices in August, due mainly to a fall in fuel prices. The annual rate of headline inflation decreased to 9.9% in August from 10.1% in July, compared with expectations of 10.1%. "However, the underlying picture remains mixed", say analysts at Berenberg. "Whereas measures of domestic price pressures such as core inflation and services prices worsened in August, external pressures eased somewhat amid a deceleration in annual rates of growth in goods and producer prices."

 

Economic highlights of the day:

British monthly inflation, European industrial production and US producer prices are today's main indicators. All the macro agenda here. 

The dollar is on par with the euro at EUR 0.9997. The ounce of gold is worth USD 1706. Oil is up, with North Sea Brent crude at USD 94.21 per barrel and U.S. light crude WTI at USD 88.46. The yield on 10-year U.S. debt climbs to 3.43%. Bitcoin has stalled at USD 20,300.

 

On markets:

* Alphabet - The European Court of Justice has dealt the owner of Google another setback by refusing to cancel the fine imposed by the Commission for abuse of a dominant position, reducing it by 5% to 4.125 billion euros.

* Starbucks expects to grow its like-for-like sales by 7% to 9% a year over the next three years and could distribute about $20 billion to its shareholders over the same period, the group said Tuesday at an investor presentation day. The stock was up 2.1% in after-hours trading after the U.S. markets closed.

* Moderna has held discussions with Chinese authorities about possible shipments of its COVID-19 vaccine to China but no decision has been made at this stage, CEO Stephane Bancel said Wednesday.

* Johnson & Johnson gained about 1% in premarket trading after announcing a share buyback plan that could amount to $5 billion.

* Railway Transportation Companies retreated in pre-market trading on the risk of a full-scale strike if ongoing talks between management and unions fail. Union Pacific and CSX lost between 0.8% and 1.7%.

* Citigroup plans to complete the spin-off of its Mexican retail banking business next year, either through a sale or an IPO, its chief financial officer said Tuesday.

* Raytheon Technologies - The defense group lowered its annual free cash flow forecast to about $4 billion from $6 billion to take into account rising costs and supply chain strains.

* Bed Bath & Beyond gains 1.6% in pre-market trading after Reuters reports that interim CEO Sue Gove may hold the job for at least a year.

 

Analyst recommendations:

  • Bristol-Myers Squibb: Berenberg lowered its recommendation to "hold" from "buy".
  • Croda: Jefferies upgrades from hold to buy targeting GBp 8200.
  • Eastman Chemical: Wells Fargo Securities downgrades from Overweight to Equal Weight. PT up 13% to $95..
  • EasyJet: Stifel downgrades from hold to sell targeting GBp 300.
  • Fevertree: Jefferies remains "Hold" with a price target raised from GBp 900 to GBp 1000.
  • International Consolidated Airlines: Stifel downgrades from hold to sell targeting GBp 86.70.
  • Intertek: Numis moves from accumulate to buy targeting GBp 5000.
  • Match Group: Loop Capital Markets downgrades to hold from buy. PT up 0.4% to $60.
  • Merck: Berenberg raised its recommendation to "buy" from "hold".
  • Nikola: BTIG upgrades to buy from neutral. The price target is $12.
  • Ocado: Credit Suisse downgrades to underperform from neutral. PT down 11% to 590 pence.
  • Oracle: Berenberg initiated coverage with a recommendation of hold. PT down 5.3% to $72.
  • PayPal:  Raymond James raised its recommendation to "outperform" from "market perform".
  • Starbucks: Fubon Securities upgrades to buy from neutral. PT up 17% to $103.
  • Target: KeyBanc starts coverage at overweight with $200 price target
  • Treatt: Jefferies starts tracking as Buy, targeting GBp 750.
  • Walmart: KeyBanc starts at overweight with $155 price target.