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09 May 2022

Market Round-Up

As fears of inflation growth continue, the US Federal Reserve (Fed) is expected to become more aggressive in its tightening of monetary policy as it is poised to raise the benchmark policy rate by half a percentage point for the first time since 2000. This comes as it formalises plans to shrink its US$9tn balance sheet. With the two-day policy gathering ending on 4th May, the Federal Open Market Committee confirmed that it will raise the federal funds target range to between 0.75% and 1%. This marks the first time that the Fed has approved a rate rise at back-to-back meetings.

At its meeting in the previous quarter, the central bank raised rates by 0.25% from their near-zero level where they have loitered since the onset of the COVID-19 pandemic in March 2020, and it signalled that further increases would follow this year. A combination of a torrid US economy, persistent supply chain issues, the conflict in Ukraine and trillions of dollars in stimulus have fuelled a 6.6% increase in prices since last March, and the bank is aiming to raise borrowing costs fast enough to take a bite out of inflation without slowing the US economy into recession. This has meant that top officials have backed a much more rapid withdrawal of their policy support to combat fears of price pressures becoming entrenched.

After receiving the go-ahead from Chairman Jay Powell, the Fed will now endorse the central bank moving monetary policy to a neutral setting, which officials have suggested is a rate between 2% and 3%. Many economists, however, believe the neutral Fed funds rate is in fact much higher, going by how much inflation has exceeded its 2% target. The central bank is also set to shrink its sizeable portfolio of Treasury and agency mortgage-backed securities which it has been building up since early 2020 to support the economy. It is expected to begin reducing this in June through a process called run-off: halting the reinvestment of the proceeds of maturing securities. The monthly pace is forecast to be increased by the central bank over three months to a rate of US$95bn, consisting of US$60bn in treasuries and US$35bn in agency mortgage-backed securities. Once this Treasury rate is hit, the Fed will make up the difference by reducing its holdings of shorter-dated Treasury bills.

UK-based clothing company Boohoo is in trouble again as it warned of revenue slowing even further and operating costs rising. This announcement has sent its share price, which rose above 400p during 2020, down 12% to 70p in early trading on Wednesday after its earnings release, and it further reduces the chance that the two remunerative management incentive schemes will pay out. This marks a big downfall for the company from its great success at the onset of the pandemic when store-based rivals were forced to close, and it switched to producing the loungewear that was in high demand during lockdowns. As high street rivals have reopened, however, Boohoo has signalled four times in the past year that its revenue is slowing, while an increase in customers returning products and soaring freight costs further squeezed profit margins.

In the year to February 2022, Boohoo achieved 14% sales growth, yet it has predicted low single-digit sales growth for the year to February 2023 against analyst forecasts of around 9%. The forecast for profit margins has also been downgraded, declining from pre-pandemic levels of close to 10% to 6.3% in the year just gone, bringing predictions down to between 4% and 7% for the year ahead. Chief Executive John Lyttle has said that the higher rate of product returns is a result of a change in consumer habits as they purchase more items such as dresses in place of loungewear, as restrictions lift in the UK. Such items are more likely to be returned for reasons of fit or style than casual elasticated jogging bottoms and loose hoodies. International sales were also disappointing as transport disruption means that the cost of fulfilling orders is greater. Parcels aren’t being delivered quickly enough, where ten working days means two weekends and for the target consumer who is likely to want their order for a relatively last-minute night out, this time scale is unacceptable.

In response, the company has built a distribution centre in the US while also manufacturing more clothing in Turkey and North Africa, from where it can be transported to the UK by truck. This serves the purpose of reducing its dependence on heavily disrupted air and sea freight routes from Asia. In a similar way to competitors, Boohoo is additionally increasing efficiency by investing into the automation of its warehouses. Unlike Next and Primark, the company has marked raising prices as a last resort. Despite these changes, with the extent of Boohoo’s decline, the stock would have to stage a spectacular recovery if the company were to return to its success of the early pandemic.

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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