The Bank of England have moved to increase rates by 0.5% to 3.5% as expected and taken rates to the highest level in well over a decade.

The BoE followed the US Fed in moving rates higher by 50 bps as inflation rates start to fall, but remain at historically high levels and pile pressure on household spending.

The FTSE 100 was trading down 0.4% at the time of writing with consumer shares leading the losses.

Falling inflation has reduced the trajectory of interest rates which has been welcome news for equity markets that have largely priced in slower rate hikes.

However, inflation remains persistently high and further rate hikes are expected in early 2023.

“Since the last Monetary Policy Committee Meeting in early November, pressure on the Bank of England to maintain market confidence has abated somewhat and, while further rate rises are priced, the extent of further rises expected has fallen dramatically compared to those seen in the wake of the now infamous “mini” budget,” said Chris Arcari, Head of Capital Markets, Hymans Robertson.

The FTSE 100 was trading down 0.4% at 7,461 shortly after the announcement but has staged a significant rally since October. GBP/USD was down 0.9%.

Despite inflation rates falling, there is a consensus building that even if rate hikes slow in their pace, rates will remain at elevated levels for some time to come. Fed chair Jerome Powell alluded to an extended period of high rates overnight in the US.

“Judging by the market’s reaction, there’s plenty of smart money out there that thinks the most likely scenario is that rates are higher for longer. That means a deeper recession next year that could blow into 2024,” said Samuel Fuller, Director of Financial Markets Online.

Consumer shares were among the biggest faller following a poor set of results from Currys. There was very little movement in FTSE 100 constituents as a result of the rate hike but analysts highlighted the ongoing plight for consumer shares with high rates and rising prices.

“Even with an increase in rates, when coupled with sky-high inflation, anyone with cash or near cash savings will see their money being eroded in real terms. And this is likely to be felt more acutely by pensioners who are likely spend a higher proportion of their cash savings on energy bills,” said Les Cameron, savings expert at M&G Wealth.

The AGM Statement by Mark Hammond, Executive Chairman of the DX (Group) (LON:DX.) was very encouraging for shareholders of the delivery solutions group, whose shares were suspended for some eight months of this year.

“Trading in the first quarter of the new financial year was in line with management expectations. I am pleased to announce today that trading to date remains in line, and that the pipeline of new business opportunities continues to be very healthy. The Group remains in a strong financial position, with high levels of liquidity and significant net cash.”

The Group’s Business

Established in 1975, DX is a market leader in the delivery of mail, parcels, pallets and freight of irregular dimension and weight.

The group, which provides a wide range of specialist delivery services to both business and residential addresses across the UK and Ireland, operates through two divisions, DX Freight and DX Express.

DX now provides one of the widest ranges of overnight delivery services in the market, as well as logistics services. 

Items that DX transports range from confidential documents and valuable packages to large, awkward-to-handle freight, unsuitable for automated conveyor.

Analyst Opinions – price targets ranging 50p to 57p share

Analyst Guy Hewett at finnCap, the company’s NOMAD and joint broker, has estimates for the current year of £457.0m sales, £25.4m adjusted pre-tax profits, earnings of 3.5p and a 1.5p dividend per share.

He is even more bullish for 2024 looking for £475.6m revenues, £29.9m profits, 4.0p earnings and a 1.7p dividend per share.

Hewett has a 57p Target Price out on the shares. 

Over at the other joint broker, Liberum Capital, their analyst Gerald Khoo considers that the group’s shares have attractive fundamentals, while the company is resilient in its trading.

For this year his figures suggest £453.0m revenues, £26.7m profits, earnings of 3.3p and a similar 1.5p per share dividend. 

Liberum Capital rate the shares as a Buy and have upped their Target Price to 50p (45p).

Conclusion – from 26.5p to 35p 

I reckon that this group’s shares are looking distinctly undervalued at just 26.5p, trading at around 8 times current year earnings and yielding almost 6%.

Before the group provides a further update on trading in February it is reasonable to expect the shares looking to rise clearly over the 30p barrier, with 35p being a good price objective in 2023.

Weaker than expected UK and US CPI inflation data has set the scene for a potentially tumultuous instalment of central bank action from the Bank of England and Federal Reserve over the next 24 hours.

Equity markets rallied sharply yesterday as US CPI fell to 7.1% and investors positioned for a dovish tweak to the Fed’s perspective on interest rates.

“Tonight’s rates decision from the US Federal Reserve remains finely poised but a less aggressive rate hike seems likely – the FTSE 100 dipped a little this morning as investors remain in ‘wait and see’ mode ahead of the decision,” said Russ Mould, AJ Bell investment director.

If either the Fed or BoE give any indication of hawkishness going into 2023, one would expect significant volatility in equities.

FTSE 100 housebuilders

The majority of FTSE 100 constituents were trading negatively on Wednesday ahead of the Fed’s decision at 7pm. There was pronounced weakness in those stocks particularly exposed to interest rates including UK banks and housebuilders.

“Housebuilders acted as a drag on the index, suggesting worries about the housing market and the impact of higher borrowing costs on demand persist,” Mould said.

Ocado was the FTSE 100’s top faller as heightened volatility in the retail technology company persisted. The company’s shares were as much as 10% higher at one point in yesterday’s session.

Rio Tinto and the rest of the FTSE 100’s diversified miners were also among the fallers after posting substantial gains in November. Precious metals miners Fresnillo was up 2.5% as gold prices held above $1,800 after a surge yesterday.

The FTSE 100 is down 1.2% so far in December following a significant rally from lows around 6,800 in October.

Whether the FTSE 100 is able to deliver a seasonal ‘Santa rally’ and produce a positive performance in December will likely be dependent on what happens over the next two days.