Must read: China GDP, UK house prices, DFS, Richemont, UK inflation

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

GLOBAL MARKETS

European markets have opened mixed after a strong performance last week. Focus in the coming days is on US earnings season with results from The Goldman Sachs Group Inc (NYSE:GS), Netflix Inc (NASDAQ:NFLX), Tesla Inc (NASDAQ:TSLA) and more, providing pivotal clues into the strength of corporate America.

UK inflation figures on Wednesday will also be closely watched for insight into the Bank of England’s next move. 

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Overnight, we heard that China’s economy grew by 6.3% year-on-year in the second quarter, falling short of expectations for 7.3%, but faster than Q1 at 4.5%. A weak performance in Q2 2022 flattered this year’s percentage growth figure. As a result, China sensitive stocks on the FTSE 100 such as the miners and oil and precious metals are under pressure.

UK RIGHTMOVE HOUSE PRICE INDEX 

UK Rightmove house prices fell by 0.2%, or £905 month-on-month in July, versus 0% in the prior month. Year-on-year growth decelerated to 0.5% from 1.1% in June. The average asking price now stands at £307,907, still 2.6% higher than in January, with Rightmove commenting that ‘buyer demand remains resilient’. However, the supply of available properties listed on Rightmove is 12% below pre-Covid levels from 2019. 

The UK’s sluggish economic growth backdrop, rampant inflation and the Bank of England’s monetary tightening path are weighing on the housing market, as mortgages become increasingly costly and consumer budgets get squeezed. Smaller homes are more shielded from the headwinds as first-time buyers try to make the most of the cheaper property market where they can despite the rising cost of debt.

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However, many homeowners are holding off from listing their properties amid the uncertainty, limiting the supply of flats and houses listed for sale. But stemming an even steeper slide in the property market is a chronic undersupply of housing in the UK, exacerbated by the rise in cost inflation, which disincentivises building. 

The combination of limited supplies and rising mortgage rates have prompted more potential would-be buyers to head to the lettings market instead, sending the cost of renting sharply higher.

DFS FURNITURE 

DFS Furniture (LSE:DFS) is on track to achieve profits of just over £30 million for the full-year 2023 and expects to achieve profit growth next year. It is ‘confident’ in its long-term targets of £1.4 billion of revenue and 8% profit before tax. However, the furniture company is uncertain about the broader market environment, commenting that market volumes are down 15-20% this year with consumer demand impacted by the macroeconomic environment. 

DFS shares fared extremely well during the pandemic, thanks to the stay-at-home boom in DIY and home improvements, when many consumers enjoyed extra disposable income when travel, restaurants and high street shops were out of reach. However, since the highs in 2021, shares have been under pressure as the cost-of-living crisis weighs on consumers’ propensity to spend. DFS however remains optimistic, focusing on cutting costs to preserve margins in an attempt to counteract the challenging market backdrop. 

Shares are down around 28% year-to-date, sharply underperforming the wider UK market.

RICHEMONT 

Compagnie Financiere Richemont SA Class A (SIX:CFR) reported first quarter sales growth of 14%, or 19% when measured in constant currencies, to 5.32 billion euros, just below analysts’ expectations. There was particular weakness in the Americas where sales fell by 4%, or 2% in constant currencies. However, this was partially offset by strength in Asia, where there has been a rebound in demand since the unwinding of China’s strict anti-Covid lockdown restrictions last year. 

Luxury stocks have outperformed this year. This segment of the retail market has been quite resilient to the macroeconomic headwinds, with high-end customers less affected by the cost-of-living crisis and luxury brands able to increase prices without significantly denting demand. In fact, demand for some luxury items increases as prices go up. 

Shares in Richemont have enjoyed a strong 2023 so far, rallying over 20% until Friday’s close, reflecting strong demand from the Asia Pacific region for its brands like Cartier and Van Cleef & Arpels. However, the stock is lower by over 7% today, sharply reducing its year-to-date gain, pricing in concerns about weakness in America. Richemont’s results are dragging other stocks in the sector like LVMH Moet Hennessy Louis Vuitton SE (EURONEXT:MC), Kering SA (EURONEXT:KER), Hermes and Moncler into the red, amid nervousness about a potential broader slowdown in demand for luxury goods as belts tighten.

WEDNESDAY UK INFLATION PREVIEW 

After defying expectations by coming in hotter-than-anticipated last month, the UK headline rate of inflation is seen falling back on Wednesday, although it is expected to remain above 8%, highlighting the lingering price pressures in the domestic economy. This contrasts with inflation in the US, which has shown meaningful signs of normalisation.

On the one hand, energy prices have been coming down and food price inflation is expected to ease with supermarkets cutting prices to attract customers while consumers feel the squeeze. On the other hand, wage growth hit a record high in the three months to May, raising the risk of second round inflationary effects if businesses pass on their additional cost pressures to consumers through higher prices.

Central bank watchers will be paying close attention to Wednesday’s inflation reading. Current expectations are for a 50-basis point hike from the Bank of England at its next meeting in August, although this could shift to 25 basis points if the inflation data posts a notable drop.

The pound has been on a tear lately, rallying over 3% so far this month, partly driven by a weaker US dollar which looks set to log its worst week since November. This reflects growing expectations that the Federal Reserve could be nearing the end of its rate hiking cycle as US inflationary pressures subside. A cooler-than-expected UK inflation reading could prompt an abrupt end to sterling’s recent bull run.