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20 June 2022

Market Round-Up

With US inflation at its highest level in 40 years, the Federal Reserve (Fed) has taken the step of raising the benchmark policy rate by 0.75% in an aggressive plan to tighten monetary policy over the next few months. It has also suggested that another rate rise of the same size is possible at the next meeting. A 75bps increase was unexpected given its previously communicated plans for a second consecutive 50bps rate rise, which had been explicitly signalled by policymakers before the start of a scheduled “blackout” period ahead of the meeting. In this period, policymakers’ public communications are limited.

Two disconcerting reports released last week highlighted that consumer prices in May had jumped higher than expected and subsequently brought a concerning rise in inflation expectations, suggesting American confidence in the economy is deteriorating. Fed Chair Jay Powell pointed to inflation as the major determining factor in the decision to increase rates by the largest magnitude since 1994. Although he says that rate hikes of this size should not become common practice, an increase of either 0.50% or 0.75% is likely at the central bank’s next meeting.

The Fed has said that it is highly alert to inflation risks in which Russia’s invasion of Ukraine has created supplementary upward pressure on prices while also dampening economic activity. China’s zero-COVID policy and subsequent extended lockdowns are also heightening the supply chain disruptions, worsening cost-push inflation.

Three months ago, officials at the US central bank pencilled in the federal funds rate reaching 1.9% by the end of the year and 2.8% in 2023. These expectations have now sharply risen in which the Fed’s predictions suggest the policy rate will rise to 3.4% by the end of 2022 implying that there is yet to be at least one other 0.75% rate rise followed by a couple half-point adjustments before adjusting to a more typical quarter-point modulation. In March, predictions also suggested that GDP growth would be 2% in 2022 and 2023, and perhaps more in 2024. The Fed now forecasts annual growth in GDP to slow to 1.7% by the end of this year and maintain that level in 2023.

Meanwhile, WHSmith has been raking in the benefits from the recovery of its travel business in which it said full-year profits would be towards the top end of market forecasts. In a sector that has been hurt by disquietude about the rising cost of living, this provides some rare positive news. The FTSE 250 company announced on 15th June 2022 that revenue in the 15 weeks to 11th June  was ahead of pre-pandemic levels for the first time. This sent the group’s shares up 5% to £14.35 in early trading. WHSmith is increasingly widening its travel division where it now operates in more than 1,100 stores in airports, railway stations and hospitals and this is propelling its recovery as travel recovers post-pandemic. With more regions of the world opening up to domestic and international travel, sales reached 123% of the same period in 2019.

Many believe that there is still potential for the company to see further profit upgrades over the Summer as WHSmith say that it is well placed to capitalise on the ongoing travel recovery in its key markets in which it has a pipeline of 125 travel locations where tenders had been won, but stores not yet opened. 31 of these outlets are in Spain which is a key market for leisure travel and the company expects to open 20 of these in time for peak Summer travel. WHSmith has also expanded largely into the US where domestic travel is rife meaning airport retail outlets are skewed towards convenience items rather than duty-free purchases.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Market Round-Up
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