Traders are hoping for some calm after the worst day for markets since the steep pandemic-driven volatility seen in 2020. The Dow (DJI) plunged nearly 1,300 points on Tuesday, leaving the index down 14% in 2022, while the benchmark S&P 500 (SP500) and tech-heavy Nasdaq (COMP.IND) tanked 4.3% and 5.2%, respectively, leaving them off 17% and 26% YTD. The broad selloff accelerated into the afternoon, in a force some attributed to outsized options activity, pulling every asset class deep into negative territory from stocks and oil to crypto and gold.
What happened? There were hopes that inflation would come in weaker than expected, meaning the Fed could (eventually) ease up on its quantitative tightening cycle, but by the way things look now, it may double down on its aggressiveness. The CPI print rose 8.3% Y/Y in August vs. the 8.1% consensus forecast, while core CPI – which strips out volatile food and energy prices – rose more than expected to 6.3%, from 5.9% in July. That’s despite gas prices that have come down tremendously over the past 13 weeks, suggesting that price pressures are seeping into more parts of the economy, like housing, college tuition and medical services.
The inflation report is one of the last the Fed will see before its September meeting next week, but it did enough damage to already worrisome policy expectations. According to the CME’s FedWatch Tool, there is now a 1 in 3 chance the FOMC will raise rates by a monster full percentage point, while the probability of a half percentage point fell to zero (meaning 75 bps is a given). If that’s the case, a full-fledged recession could be around the corner, with rapidly rising borrowing costs pushing any prospects for a “soft landing” off the table.
Response from the White House: “Today’s data show more progress in bringing global inflation down in the U.S. economy,” President Biden wrote in a statement. “Overall, prices have been essentially flat in our country these last two months. Gas prices are down an average of $1.30 a gallon since the beginning of the summer. This month, we saw some price increases slow from the month before at the grocery store. And real wages went up again for a second month in a row, giving hard-working families a little breathing room. It will take more time and resolve to bring inflation down, which is why we passed the Inflation Reduction Act to lower the cost of healthcare, prescription drugs and energy.” (6 comments)
As mentioned earlier this week, another inflation threat is in the works, with a Western-style showdown threatening the U.S. economy. A duel between 60,000 rail workers, their unions and some of the largest U.S. railroad operators is already having impacts, but the worst is yet to come. A 12:01 a.m. Friday deadline to agree to new work terms hangs in the balance, with the gunslinging likely to cost the nation $2B in economic output per day if things go off the rails.
What’s at stake: There are already reports of railways stopping to take grain and animal-feed shipments, while most of them have already put a halt to ammonia fertilizer and hazardous items to ensure that sensitive cargo is not left unsecured. Other raw material deliveries are also facing uncertainty, like coal transports that could be interrupted ahead of pre-winter stocking, which could subsequently trigger an increase in gas power demand. By some estimates, the railroads in the U.S. impact about a third to about 45% of all freight in the U.S., meaning there can be knock-on effects for many industries.
“Almost all ethanol is moved via rail and it is produced in the Midwest,” noted Debnil Chowdhury of S&P Global Commodity Insights. “There is no easy substitute for rail and the U.S. government will have to make decisions around blend targets if ethanol movement to demand centers are constrained due to a strike.” Ethanol currently accounts for around 10% of U.S. gasoline volume, and prices for the commodity have already been raised at several marketplaces with sellers facing interruptions.
Supply chain threat: The current dispute goes back three years and mainly centers around pay hikes, sick leave and time-off policies. In July, the Biden administration intervened to avert a strike, naming a panel of arbitrators to mediate the contract dispute, but two remaining holdouts – the Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal, Air, Rail and Transportation Workers – account for over half of the rail labor force. The Biden administration is now speaking with truckers and air freight companies to assess alternative modes of transportation, but if things get real bad, Congress may be forced to impose contractual terms or send the dispute to forced arbitration. Emergency powers could also be used by the White House for the delivery of critical materials. (7 comments)
The EU’s General Court has upheld an antitrust ruling against Google parent company Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) for imposing unlawful restrictions to consolidate the dominant position of its Android operating system. It’s a major fine at $4.1B, though it was reduced by 5% from the original $4.3B price tag following the appeal. The ruling bolsters the recent crackdown campaigns of European Competition Commissioner Margrethe Vestager, who has forcefully targeted U.S. tech giants over anti-competitive behavior and market dominance.
Backdrop: An initial fine for Android abuse was issued by the European Commission in 2018, and was the biggest of three antitrust penalties totaling more than $8B focused on mobile phones. At issue was Google’s practice of entrenching Chrome and Search on mobile devices, by forcing smartphone players to pre-install them in a bundle within the Play Store. Following the ruling, Google is likely to extend recent compliance efforts, such as offering EU users a selection screen for different search engines.
“The fine is appropriate in view of the significance of the infringement,” according to the General Court, which said Google’s business model was “based first and foremost on increasing the numbers of users of its online search services so that it can sell its online advertising services.”
Response from Google: “We are disappointed that the Court did not annul the decision in full. Android has created more choice for everyone, not less, and supports thousands of successful businesses in Europe and around the world.”
The U.S. fraud trial of former Nikola (NKLA) CEO Trevor Milton is underway after jury selection began in Manhattan on Monday, followed by opening statements on Tuesday. Milton is facing two counts of securities fraud and two charges of wire fraud, over allegations that he deceived and lied to investors about the hydrogen-powered truck maker’s technology starting in November of 2019. He could face up to 25 years in federal prison if convicted.
Flashback: The company was once an EV darling in the investing community, especially after it announced a SPAC merger in March 2020, with its valuation of $30B even briefly surpassing that of Ford Motor (F). However, the stock fell sharply after Milton was forced out of the company the following September, in the wake of fraud allegations made by short-seller Hindenburg Research. Both the SEC and DOJ opened investigations shortly thereafter, and he was indicted on three counts of fraud by a grand jury in July 2021, while prosecutors added a fourth one this past June.
Milton’s defense is expected to be that he had no intent to defraud investors, and that other top executives approved of his statements about Nikola. The trial is expected to last four or five weeks, though shares are down more than 90% from their 2020 high.
Go deeper: For its part, Nikola paid a civil penalty of $125M last year without admitting wrongdoing to settle a fraud investigation by the SEC. It also began production of its first battery-powered truck model in March, but expects to meaningfully ramp up output in the second half of the year. (8 comments).
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