Thursday preview: BoE policy announcement, Next results eyed

(Sharecast News) - On Thursday, homeware and clothing retailer Next will publish first-half numbers, while Galliford Try will release first-half results, but the main focus will be on the Bank of England rate decision.

Kathleen Brooks, research director at XTB, said Wednesday's consumer price inflation data supports a "hawkish pause" from the BoE.

"UK inflation data was in line with expectations, at 3.1% for August," she noted. "This is a rise from 2.9% in July, and is in line with expectations. Of course, the real shock to price growth will be September, when oil prices surged above $100 and the price of unleaded petrol and gas rose to their highest levels for 4 years.

"However, there is still a small sigh of relief that price pressure was not worse last month, which would have added to the increasing peak for UK prices. Unsurprisingly, transport prices added the most upward pressures to the CPI index, while core prices remained stable at 2.6%, unchanged from the July figure, and service price inflation also remained at 3.4%."

Brooks said that for now, there are no signs that inflation is passing through to the broader economy. However, there are some details in the report that will upset the hawks at the BoE, including the 6.1% annual increase in raw material costs and the 3.7% increase in factory gate prices. "Either these will be passed on to a stretched consumer, or business profit margins will get squeezed. Neither are positive for the UK economy," she said.

Brooks pointed out that core prices remained stable, which is good. However, she said the BoE has mentioned that energy prices are now key for inflation expectations instead of core prices.

"The energy price cap is expected to remain high over the winter, and there is growing concern that the price cap could rise by 25% in January if energy prices remain this elevated," said Brooks. "So, while expectations for a rate hike tomorrow from the Bank of England have been scaled back by the interest rate futures market in the wake of this CPI report, the detail of the August inflation data means that the BoE cannot take future rate hikes off the table."

There are still around four rate hikes priced in by the end of next year, she said. The only way these will be eradicated is if the war in Iran ends, and supply constraints in the Middle East are resolved.

"Until then, the spectre of a prolonged rate hiking cycle will remain over the UK, darkening the economic outlook."

As far as Next is concerned, AJ Bell analysts Russ Mould and Danni Hewson said it's both a best-in-class retailer and a "shining example" of how to behave as a public company.

"Not only getting the basics of retail right by getting the right products in front of the right customers in the right places and at the right price points but also offering clear and suitably conservative guidance on trading and shareholder returns," they said.

"A growing international arm, the inclusion of third-party items on its site and the provision of logistics services to said third parties are all levers the company has been able to pull to support growth in recent years. Something which has been rewarded with a near-record share price.

"If Next was a weather forecaster it would probably tell you to grab an umbrella when the sun was shining, such is its commitment to managing expectations. This is a key skillset for a public company, the ability to under-promise and over-deliver is often richly rewarded by the market. Given the gloomy macro-economic environment, it will be instructive to see if management are tempted to temper expectations.

"The market already knows Next achieved strong revenue growth in the first half thanks to its period-end trading update in August. The company may also guide on the impact of a decision from the Employment Appeal Tribunal which recently wiped out a looming £30 million back-pay liability regarding wages in its stores and warehouses."

In the US, housing starts and building permits data for August will be eyed.