FTSE 100 lower ahead of Bank of England rate decision, bid chatter lifts Ocado, DS Smith makes up for lower volumes with price increases and Whitbread’s recovery gathers pace

“The FTSE 100 was looking pretty sickly on Thursday morning as it awaited an interest rate hike from the Bank of England,” says AJ Bell Head of Financial Analysis Danni Hewson.

“For markets the cure of higher interest rates could be worse than the disease of high inflation amid speculation a 50-basis point rise could be in the offing. Hawkish rhetoric from the US Federal Reserve is also doing little for sentiment.

“Inflation is proving more stubborn than expected in the UK and the brains trust in Threadneedle Street seem to have little answer other than employing the blunt instrument of rate hikes to try and bring things under control.

“The pain felt by mortgage holders may not be enough on its own, given older people who own their homes outright are relatively immune from higher borrowing costs and may even be benefiting from an increased return on their savings. Messaging from the Monetary Policy Committee will be closely scrutinised – will the Bank look to dampen expectations for rates to reach 6%?

“Bid chatter helped lift web-based food delivery firm Ocado. The shares have been about as flat as an open bottle of lemonade since the pandemic but third parties, including reportedly Amazon, may still see value in the brand, technology and infrastructure.

“Ocado’s hopes of becoming an online groceries partner to businesses across the globe has only had limited success and shareholders may be open to a bidder putting them out of their misery.

“Packaging firms tend to closely follow GDP and so the lower volumes reported by DS Smith were no great surprise, however the company was able to compensate by increasing prices. How long it is able to do so is an open question.”

Whitbread

“In an environment clouded by inflation and interest rate worries, it’s refreshing to see some good news from UK plc. Whitbread is having no problem getting people to spend the night at its Premier Inn hotel chain and its sites in London are proving to be a strong magnet for tourists and business travellers.

“Premier Inn has managed to distance itself from Travelodge and other budget chains in terms of how it is perceived by people needing accommodation. In particular, business customers seem happy to stay at one of its hotels, including those forced by their employer to seek a cheaper option.

“Having bounced back strongly as the pandemic faded away, the focus is now on making sure its rooms are as full as possible so it can charge a little bit more per customer. There is still plenty of room to grow occupancy rates, particularly in Germany where hotels were less than two thirds full on average over its past financial year.

“The market is also focused on what Whitbread plans to do with its pubs and restaurants which are up for sale. Mitchells & Butlers is rumoured to be among the interested parties. How a business separation would work in practice is an unknown – Whitbread relies on many of these sites to provide food for Premier Inn customers so it will either have to enter into a formal arrangement with the new owner or come up with a different solution.

“The big unknown for demand going forward is consumer confidence. With interest rates going higher, there will be a chunk of its customer base who might need to think twice about a weekend away. However, plenty of people haven’t been impacted by higher rates such as those who have paid off their mortgage or are on fixed rates and don’t need to re-mortgage in the immediate future. It’s feasible to suggest they could keep spending merrily, with Whitbread a likely beneficiary.

“Travelodge is up for sale with a rumoured £1.2 billion price tag – getting anywhere close to that amount could put the spotlight on Whitbread and whether Premier Inn sites are currently undervalued.”

These articles are for information purposes only and are not a personal recommendation or advice.