Central banks walking the tightrope as UK inflation stays high, Nike still not on winning form and Fevertree price hike plan welcomed by investors

“Today’s UK inflation reading was pretty much the worst possible news for the Bank of England ahead of its rate decision tomorrow,” says AJ Bell Investment Director Russ Mould.

“The Bank has two key roles – preserving financial stability and keeping a lid on inflation. To fulfil the former, it might have considered a pause on rates, after a crisis in the banking sector which had some uncomfortable echoes of events 15 years ago.

“However, the continuing surge in consumer prices means it can ill-afford any sort of let-up – unless it decides the uptick in inflation can purely be attributed to the salad and vegetable shortage which struck in February.

“There are reasons to think inflation will slow from here as annual comparisons with the period immediately after the Russian invasion of Ukraine start to lap the inflationary pressures unleashed by the conflict.

“But before eyes turn to Threadneedle Street the Federal Reserve is set to announce its own call on interest rates later today.

“The dangers of moving too far off the course plotted before the collision with an SVB-shaped iceberg is that it could undermine market confidence and lead to the conclusion the Fed has spied more vulnerabilities in the financial sector which investors are not yet aware of.

“Central bankers have been performing a high-wire act for several months, but it feels like the tightrope is getting thinner and higher by the day.”

Nike

“After last year’s problem with excess inventory and earnings being hit by the strong US dollar, the market had started to become more optimistic that these issues would be ironed out. Sadly, we’re not quite there yet.

“While third quarter earnings were better than expected, inventories still look high which means the company is having to slash prices to clear stockpiles. That’s evident in a drop in margins.

“Perhaps more disappointing was the rate of sales growth in China. Hopes were high that Chinese consumers would splash the cash as the country relaxed its Covid containment measures, enabling people to move more freely and to start to enjoy life as they used to know it.

“Equipment sales were in sharp decline, apparel was also weak, while footwear sales growth wasn’t a patch on the levels seen in other parts of the world. One could give Nike a break given this is only a short trading period, yet if China sales don’t pick up dramatically in its fourth quarter the market will not be happy.

“A lot of people expected China’s consumer spending to rocket the second the government announced the relaxing of Covid rules. It seems logical to expect a more gradual recovery.

“Nike’s products certainly haven’t gone out of fashion and as long as we don’t see a major economic downturn then there seems a good chance it will continue to shift a large number of units.

“The company is simply a victim of its own success. Its stellar performance over the years has led many people to expect knock-out sales growth every quarter and this is hard to achieve.

“Nike isn’t immune to the challenges of doing business such as unfavourable foreign exchange rates, supply chain issues and fluctuating economic conditions, and it makes sense that it is taking a more cautious approach to the months ahead given the uncertain backdrop.”

Fevertree

“Investors have responded positively to a message which came through loud and clear in Fevertree’s latest update – the company believes its brand is strong enough to be able to pass on higher costs.

“Fevertree has been hit hard by an increase in the cost of manufacturing glass bottles – which account for a significant chunk of its sales and are a key part of its premium appeal over and above rivals’ products.

“Flexing on price seems a fair move for Fevertree. Relative to the cost of the spirit it is being mixed with, a slightly higher outlay for a nicer tasting mixer might well be something a drinker is prepared to wear.

“Freight costs should be addressed by expanding its bottling capacity in the US and the market certainly likes the look of Fevertree’s plan to boost earnings. It has restored some fizz to the share price – now the company needs to make it work.”

These articles are for information purposes only and are not a personal recommendation or advice.