Mass-market brands suffer as consumer strength declines

Today’s top stories

• Iran has vowed revenge after it accused Israel of assassinating Ismail Haniyeh, Hamas’s political leader.

• Kamala Harris has almost flattened Donald Trump’s lead in the race for the White House.

• Russia launched almost 90 drones on Ukraine in one of its largest attacks since the war in Ukraine began.

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Good evening.

Has the post-Covid consumer demand surge peaked? That is the concern among market observers as a host of big brands have undershot expectations with their earnings this week.

Starbucks, that American staple, yesterday suffered a second consecutive quarterly drop in global sales, citing the “cautious consumer environment” for its floundering third-quarter results. The coffee house chain has been encircled by challenges on numerous fronts, among which are a baristas’ union, an aggressive activist investor, boycotts over the group’s perceived stance on the war in Gaza and pillorying rejoinders from the chain’s former chief. But waning consumer strength still drove the narrative on the company’s earnings call. 

It followed McDonald’s, which reported its first global drop in sales since 2020 on Monday, as consumers retrench in the face of higher prices. Investors have driven the chain’s share price down more than 10 per cent in the year to date. In an open letter, McDonald’s executive Joe Erlinger criticised certain menu items for having outpaced inflation. And Lamb Weston, which supplies potatoes to the chain, said that already flagging demand had “accelerated” in recent months.

Companies such as Whirlpool, UPS and numerous airlines have also raised the alarm in the past week. 

The Federal Open Market Committee will be watching these earnings misses closely ahead of today’s rate cut, as it evaluates the role of its 23-year high benchmark interest rate on the sentiment slowdown. General consensus suggests that the Federal Reserve will hold rates firm, though flagging demand will complicate the debate on the wisdom of a cut in September.

Foreign manufacturers are fretting, too. Anaemic demand from western buyers is weighing on furniture, clothing and toy producers in China, causing companies to slash headcount and substitute in cheaper synthetics. The slowdown is provoking anxieties in the politburo. 

Are consumers just becoming more fickle? “Brand loyalty ain’t what it used to be”, writes the FT’s Brooke Masters. Today’s consumer is eschewing fidelity in the face of inflation and the pressures of the cost of living. Perhaps attitudes are hardening against big business as consumers’ outrage mounts at practices such as “shrinkflation”.

But Kathy Bostjancic, chief economist at Nationwide Mutual, disagrees. She told the FT that she expected consumers to continue reining in spending. “Pandemic savings [are] depleted, lower-income households increasingly maxed-out on credit and . . . employment growth will continue to cool,” she said.

Need to know: UK and Europe economy

Eurozone inflation edged up to 2.6 per cent in July, outstripping expectations and casting a shadow over the prospect of a September rate cut by the European Central Bank.

Recriminations fly after UK chancellor Rachel Reeves accused the Conservative party of covering up a near £22bn black hole in the public finances.

Traders in swap markets have given a probability of more than 60 per cent that the Bank of England will cut rates tomorrow, hedging their bets on the UK’s slowing earnings growth, falling job vacancies and higher than expected unemployment figures.

Need to know: Global economy

The Bank of Japan raised interest rates to 0.25 per cent today, in an attempt to arrest the yen’s decline.

Pakistan’s banks are accruing bumper profits as high interest rates bring huge returns on the government’s ever-expanding debt burden.

Hong Kong’s economy grew 3.3 per cent year on year in the three months to June, driven by a strong demand for exports, which prevailed over declining domestic consumption across the territory.

Need to know: business

Microsoft’s quarterly earnings fell short of Wall Street’s lofty expectations yesterday, as analysts clamoured for signs that its huge investments into AI infrastructure would pay off.

Nvidia and Arm shares rebounded today, after falling yesterday ahead of a number of closely watched earnings reports from Big Tech companies this week.

UK pharmaceutical group GSK raised its outlook for the year, after strong sales of its cancer and HIV drugs outstripped analysts’ expectations.

Rio Tinto’s chief has warned that big mergers and acquisitions activity could steer the company off course, despite the wide consolidation efforts across the sector in recent months.

Ares Management has secured a record-breaking $34bn private credit fund, giving it tremendous firepower at a time when rivals are racing to build their own war chests.

Delta Air Lines’ chief Ed Bastian will seek damages from the disruption caused by CrowdStrike’s IT outage, which he has said cost the company $500mn.

The World of Work

BlackRock president Rob Kapito has accrued millions of dollars in his retirement pot through an unusual private equity-style bonus plan, from which he is the only executive at the firm to benefit. Read more about how it works here.

Should you own up to your mistakes at work? Listen to the latest edition of the Working It podcast to hear the FT’s Isabel Berwick’s take.

Some good news

As my colleagues and I swelter in the London heat this week, many of us are wishing we could be anywhere else. Well, maybe not anywhere. Nasa has released pictures of Epsilon Indi Ab, the most frigid exoplanet to have ever been imaged, with a temperature just above 0C. Learn more about this fascinating feat of science here.