Must read: FTSE 100, UK interest rates, H&M, Serco

It's all about the Bank of England and European policymakers as they decide the next move on interest rates. Our head of investment also runs through the day's big company news. 

GLOBAL MARKETS 

European markets are in the red, taking their cues from a negative close on Wall Street last night. That was after the Federal Reserve’s dot plot suggested the terminal rate could be higher than expected and above 5% as it lifted interest rates by a more moderate 50 basis points.

Focus shifts to the European Central Bank and the Bank of England today which are both expected to also hike rates by 50 basis points each.

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BANK OF ENGLAND 

The Bank of England is expected to vote in favour of a more tempered 0.5 percentage point interest rate increase to 3.5% at its meeting today. This will immediately impact those on variable rate mortgages while those with fixed rate mortgages set to expire soon will have to refinance at higher rates. 

When the Monetary Policy Committee last met in early November, it carried out the biggest hike in over 30 years, raising rates by 0.75 percentage points to 3% in attempt to tame the UK’s sky-high inflation and price instability. 

At today’s meeting, there are likely to be a range of opinions on policy from members of the MPC. Some hawkish members could vote for a more aggressive 75 basis point hike to help drive inflation and inflation expectations lower while some dovish members could vote for no change at all, fearing the negative impact of too much tightening at a time when the UK is heading towards a recession. 

This week’s UK CPI data saw price increases slightly pullback from an annual rate of 11.1% in October, a 41-year high to 10.7% in November in an early indication that inflation may have already peaked. However price levels are still running way too hot. 

The pound has been staging gains against the US dollar since the trough at the end of September, when investors started to pull away from the long dollar trade amid optimism that US inflation was set to ease and the Fed would pivot towards a less hawkish approach. That has since materialised with this week’s US annual inflation data which slowed for a fifth straight month in November to 7.1%, while the Fed raised rates by a smaller 50 basis points last night. However, Wall Street closed lower overnight after the Fed’s dot plot pointed to further interest rate hikes next year, bringing the terminal rate to 5.1% in 2023, higher than the central bank’s previous forecast for 4.6%.

H&M SALES 

Hennes & Mauritz AB Class B (OMX:HM B) reported a 10% rise in September to November quarterly sales, ahead of expectations for an increase of 9.5%. Fiscal fourth quarter revenue hit 62.5 billion crowns versus expectations for 62.17 billion crowns and ahead of 56.8 billion crowns a year ago. During the quarter its operations in Russia and Belarus were wound up while 25-50 stores in China were temporarily closed because of Covid. 

Last month, H&M announced plans to cut 1,500 jobs as part of its global cost and efficiency programme with savings expected to come through in the second half of next year. Although the Swedish fashion retailer is dealing with pressures from cost inflation, a weakening consumer, and the economic slowdown, it managed to top expectations in terms of quarterly sales, thanks to its attractive discounts and stronger demand in the all-important build up to Christmas. Customers may also be switching from more expensive brands towards cheaper labels like H&M when buying winter essentials like coats and gloves to offset pressures from the cost-of-living. 

Shares are trading lower today, caught up in the broader risk-off market mood. H&M has shed more than a third of its stock market value this year, sharply underperforming its rival Inditex which is down a more modest 10%.

SERCO 

Serco Group (LSE:SRP) forecasts 2022 revenue to come in at £4.5 billion, slightly ahead of 2021 levels and ahead of its previous estimate for £4.3-4.4 billion. The outsourcer also raised its full-year underlying trading profit guidance from £230 million to £235 million. Plus, in 2023 it expects revenue of at least £4.6 billion but profit to come in around 2022 levels amid rising costs. In September, Serco acquired Swiss-based specialist immigration services provider ORS. 

Shares in Serco have gained more than 10% year-to-date, outperforming the FTSE 100 which is less than 1% lower since the start of January. In the first half of the year, it performed better than expected thanks to more immigration contracts. However, like many businesses it is facing headwinds from inflation with costs on the rise. Plus, having enjoyed strong demand for Covid-related services during the pandemic, Serco has seen this tailwind taper off over the last year.