Must read: housebuilders, UK inflation, Gucci owner Kering

GLOBAL MARKETS

European markets have opened lower dragged down by luxury stocks. Burberry Group (LSE:BRBY) has plunged more than 5%, languishing at the bottom of the FTSE 100 after a disappointing update from Gucci’s parent company Kering SA (EURONEXT:KER).

Interest rate sensitive stocks like housebuilders Persimmon (LSE:PSN) and Taylor Wimpey (LSE:TW.) are trading near the top of the UK blue chip index after UK inflation data fell by more than expected in February. 

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All eyes are on the Federal Reserve’s rate decision this evening for clues about when the central bank might begin cutting interest rates.

UK INFLATION 

The UK Consumer Price Index (CPI) rose by 3.4% in February, below forecasts and down from 4% in January to touch the lowest level since September 2021. Month-on-month inflation rose by 0.6%, below analysts’ expectations for a reading of 0.7%.

Increases in rental costs were offset by slower restaurant and café prices as well as downward effects from unchanged food prices versus a large rise last year. Food and non-alcohol drinks inflation hit 5% in the year to February, down from 7% in January and the lowest level since January 2022, easing for eleven straight months. Restaurants and hotels inflation eased to 6% the lowest level since February 2022. And Inflation for motor fuels was negative for the twelfth straight month.

Inflation is certainly moving in the right direction, quicker than expected and is forecast to reach the 2% target in the months ahead. Global factors such as easing global supply chain pressures and cooling energy prices combined with higher interest rates from the Bank of England, have helped price pressures retreat from a 40-year high seen in October 2022. 

Markets are pricing in a longer wait for the first rate cut from the Bank of England than other central banks such as the US Federal Reserve, with growing positive bets on the pound from hedge funds and traders reflecting this view. UK rate futures markets are pointing to 71 basis points of rate cuts by December, up very modestly from 67 basis points before today’s inflation data. Most economists anticipate the central bank will begin cutting in June.

KERING 

Kering warned that first-quarter sales will likely slump by 10%, hit by a weak performance at Gucci which is forecast to report a 20% slide in quarterly sales. The luxury brand is facing pressure from weak spending in Asia, which is usually a region that exhibits strong demand. This underscores the economic headwinds facing Asia’s largest economy China, which has been grappling with a cocktail of pressures including its property crisis, deflation and weak consumer confidence. Fickle fashionistas are known for their changeable tastes and preferences with one brand in one minute and out the next. Gucci was very much the most desirable label back in 2021 but since then its popularity has waned and demand has turned sour. 

After an initial surge at the start of 2023, shares in luxury giants like Burberry, Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC) and Kering had a tough time in the second half of last year, losing their shine among investors. However, the industry bellwether, LVMH started 2024 on a positive note, reporting better than expected quarterly sales, sending shares sharply higher in January. But a profit warning at Burberry in January combined with today’s update from Kering bode less well for the luxury sector. Recent developments show that even the high-end customer is no longer immune from pressures from the weak macroeconomic backdrop, especially in China. 

A lot is riding on the Chinese economy when it comes to the outlook for luxury stocks - consumers in China account for roughly 20% of the global luxury market. The authorities in Beijing have been trying to find ways to boost its economy and markets.

Shares in Kering have plunged by more than 14% in today’s session, on track for their worst session on record.