Interactive Investor

Must read: Federal Reserve, UK inflation surprise, British Land, Fevertree

22nd March 2023 08:44

by Victoria Scholar from interactive investor

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Our head of investment rounds up the morning's big news.

food price inflation 600

GLOBAL MARKETS 

European markets have failed to follow global markets into the green, with the FTSE 100 trading lower after UK inflation surpassed expectations, defying the recent downtrend for price pressures. British Land Co (LSE:BLND) and Land Securities Group (LSE:LAND) are trading at the bottom of the FTSE 100 after Morgan Stanley cut its price target on British Land from 460p to 450p. 

Markets in Asia tracked Wall Street higher, with the Nikkei up nearly 2% after the Nasdaq closed higher by over 1.5%. US futures are pointing to a weaker open ahead of the Federal Reserve’s key monetary policy decision later today as nervousness replaces optimism among investors. 

Oil is under pressure, snapping a two-day winning streak after US API crude oil inventories unexpectedly increased last week, despite expectations for a drawdown, suggesting demand could be slowing.

UK INFLATION 

UK February CPI rose for the first time in four months to 10.4% year-on-year, surpassing expectations for a reading of 9.9%. Month-on-month the figure rose by 1.1%, also topping forecasts for growth of 0.6%. Core CPI excluding food, alcohol, tobacco and energy rose by 1.2% month-on-month versus expectations for a figure of 0.8% and 6.2% year-on-year also ahead of forecasts for 5.7%. 

The largest upward contributions to the annual rate’s increase came from price rises in restaurants and hotels, food, clothing, and footwear. These were partly offset by downward effects from recreation and culture, and motor fuels. The annual inflation rate for restaurants and hotels hit 12.1% in February, the highest since 1991. Meanwhile, food and non-alcoholic beverage prices rose by 18.2% in February, a 45-year high. 

Today’s figure defies the recent downtrend for inflation, with price pressures picking up again, returning to a near 40-year high. This is likely to embolden the Bank of England to continue pursuing its rate hiking path despite the potentially deflationary impact of the turmoil in the banking sector. Markets are pricing in a 98% chance of a 25-basis point hike tomorrow. No doubt before that, the Monetary Policy Meeting will be keeping a close eye on the Fed’s rate decision tonight.

The pound caught a bid after the inflation data, jumping against the greenback in anticipation of more hawkish monetary policy from the Bank of England.

FEDERAL RESERVE 

At the conclusion of its two-day policy meeting tonight, the Federal Reserve will decide whether to raise interest rates by 25-basis points or keep rates unchanged. A set of forecasts for growth, unemployment and inflation will also be published. 

Hawkish bets on the Fed have been wound back in light of the turmoil in the banking sector, with the collapse of Silicon Valley Bank and Signature Bank followed by swift interventions by the Treasury and the Fed. The volatility was exacerbated by the woes facing Credit Suisse Group AG (SIX:CSGN) and its orchestrated rescue deal from UBS. 

It remains to be seen the extent to which recent events will create further contagion in the banking sector as well as a knock-on impact on the US economy. There are growing expectations that the US could be heading towards a recession. This could encourage the Federal Reserve to move more cautiously on interest rates going forward, given the potentially downward impact that a banking crisis and a recession would have on inflation stateside. The latest official estimates from December suggested that the federal funds rate could peak at 5-5.25%, however that could be reduced. It currently standing at 4.5-4.75%. 

Over the last six months, the US dollar has been under pressure, shedding around 9% against the euro and the pound, reflecting expectations that US interest rates could be approaching their peak. 

FEVERTREE DRINKS 

Fevertree Drinks (LSE:FEVR) reported a 37% fall in annual adjusted core profit to £39.7 million. Revenue rose by 11% to £344.3 million, meeting analysts’ expectations. It proposed an ordinary dividend of 16.31 pence per share, up 2% year-on-year. 

The tonic brand said the impact of elevated energy costs into glass bottle pricing is expected to be material this year and warned that conditions remain challenging. Inflationary pressures from energy, glass manufacturing, and freight costs weighed on gross margins last year. However, it is raising prices to try to offset these costs and support margins by passing them through to customers across regions, helping to boost shares. 

Investors have had a tough time with the stock lately which is down around 37% over a one-year period. It had an incredible start to life as a public company following its IPO in 2014. Investors and consumers were extremely excited about the prospect of a premium tonic brand to rival the rather dull Schweppes mixer which long held the monopoly as the only notable accompaniment to gin. However, shares peaked in 2018 and have largely been on the decline since then as Fevertree lost its sparkle. 

Shares are trading more positively today, with investors encouraged by its price increases, sending the stock higher by more than 6%.

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