I was able to start the containers using the updated compose and env (modified to my instance) of your post.
However, when trying to do the first step after composing up (the php artisan key:generate command at the pixelfed-web prompt) I get a "Unable to set application key. No APP_KEY variable was found in the .env file." error. And, yes, I've checked and the env file does have the line "APP_KEY="APPKEY"".