Must read: Bank of England, Wizz Air, Rolls-Royce

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

GLOBAL MARKETS

After the FTSE 100 fell over 1% yesterday caught up in the global market sell-off following Fitch’s US downgrade, European markets have opened in the red for the third straight day. Last night on Wall Street, the Nasdaq tumbled more than 2%, while the S&P 500 shed over 1.3%. Focus turns to the Bank of England’s anticipated rate hike at lunchtime.

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BANK OF ENGLAND

The Bank of England is expected to raise rates for the 14th time in a row at lunchtime to 5.25%, however a more hawkish 5.5% isn’t out of the question. With UK inflation still stubbornly high, much more persistent than inflation in the US or eurozone, more work needs to be done to tackle the ongoing price pressures.

Monetary policy is a notoriously blunt tool and is therefore not good for tinkering around the edges. The choice between 25bps and 50bps today is more about signalling how concerned the central bank is about inflation and growth. Late cycle rate hikes tend to work with a shorter lag suggesting a hike at this stage would have a greater economic impact than at the start of 2022.

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The post-Covid supply chain bottlenecks have eased and wholesale energy prices have pulled back. On the other hand, food inflation is still stuck in double digits with supply issues in Russia and India key risks for commodity price inflation ahead. Plus, with wage growth at a record high, labour shortages, and heavy industrial action this year, there’s a resistance to lower wages, which raises the risk of further second round inflationary effects.

The UK economy has proven to be much more resilient than last year’s forecasts. However, the manufacturing sector has been struggling and there is a chronic longstanding low productivity issue in the UK. The Bank of England needs to strike the balance between taming inflation without inducing too much economic pain. The Goldilocks scenario that the US appears to be achieving presently with cooling inflation combined with economic growth, is something to aim towards.

WIZZ AIR

Wizz Air Holdings (LSE:WIZZ) reported a 52.9% jump in first-quarter revenue to 1.23 billion euros. It swung to an operating profit of 79.9 million euros versus an operating loss of 284.5 million euros last year and carried a record 15.3 million passengers. The airline said it continues to observe positive trading in the current quarter and maintained its full-year 2024 net profit forecast.

This strong set of results from Wizz Air echoes those of rivals easyJet (LSE:EZJ), which reported a record quarterly profit last month and Ryanair, which saw earnings nearly quadruple. The budget airline industry is benefitting from a strong rebound in demand for summer holidays post-Covid as well as price increases which have helped the sector weather the pressures from cost inflation and the sluggish growth backdrop.

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There was investor angry at this week’s annual meeting over chief executive Jozsef Varadi’s £100 million bonus package with more than 25% of shareholders rejecting the proposals. Wizz Air was voted the worst airline in Britain in a recent Which? survey of UK passengers this year.

Despite the strong results, Wizz Air shares are trading sharply lower as investors remain cautious towards the stock. Other stocks in the sector like International Consolidated Airlines Group SA (LSE:IAG) and easyJet are also under pressure.

ROLLS-ROYCE

Rolls-Royce Holdings (LSE:RR.) reported a sharp jump in first-half underlying operating profit of £673 million and free cash flow of £356 million on revenues of £7.5 billion, below estimates for £5.9 billion. The engine maker said high profitability was led by civil aerospace, which enjoyed stronger operating margin, partially offset by a weaker result in power systems. Last week ,Rolls-Royce shares soared after it upgraded its full-year profit and cash flow forecasts.

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Rolls-Royce’s transformation plan is faring well with improving operations, the post-pandemic rebound in international flying and increased defence spending. However, CEO Tufan Erginbilgic said the early rate of improvement from the transformation is high and should not be extrapolated, suggesting the pick-up is likely to slow later this year, sending shares lower today.