The Week Ahead: ECB rate meeting; US Q4 GDP; Netflix, Tesla results

Here’s our pick of the top three economic and company events in the week commencing Monday, 22 January:

Tesla Q4 results

Wednesday 24 January: The Tesla share price has traded sideways in recent months, falling to five-month lows following the release of the company’s Q3 numbers in October, before rebounding by the end of 2023. So far this year, however, the shares are down 15%. Last year, CEO Elon Musk set a target of delivering 2m vehicles. Tesla fell short of that goal, delivering 1.8m vehicles during the year, though Q4 marked a new record of 484,507 vehicle deliveries, with 95% of those being the Model 3 and Model Y. The miss on full-year deliveries has stalled the progress of the share price. Also weighing on the shares is increased competition from rival electric vehicle makers, especially in China where Tesla is competing with BYD, which sold 526,000 EVs in Q4. In Q3 Tesla’s revenue came in at $23.35bn, 9% higher than the year-ago quarter, but profit fell a greater-than-expected 37% to $2.3bn, or $0.66 a share. Operating expenses rose 43% to $2.4bn, reducing margins to 7.6%, down from 17.2% a year ago, largely due to investment in the Cybertruck and AI. While total automotive revenue rose 5%, the main growth area was Tesla’s energy generation business, which saw revenue rise 40% to $1.56bn. Energy generation could become a key area of revenue growth as EVs become more mainstream. Indeed, pay-per-use charging points are likely to drive profits going forward as Tesla ramps up its charging infrastructure. Also in Q4, Tesla began delivering its first batch of Cybertrucks from its factory in Austin, Texas, which has capacity to produce 125,000 Cybertrucks annually. Consensus forecasts for Q4 indicate that revenue is likely to be in the region of $25.6bn, although price cuts during the quarter could mean the figure falls short of expectations. Meanwhile, plans to suspend production at the Berlin factory for two weeks from late January – due to a lack of parts caused by disruption in the Red Sea – could hit revenue in Q1. Revenue for 2023 as a whole is expected to come in at $97.3bn. Traders will be paying close attention to automotive gross margins, which are expected to have fallen below 20% for the first time, down from 28.5% a year ago. Looking ahead, higher production costs, in the form of increased salaries for US staff, and price cuts could weigh on estimates for fiscal year 2025.

ECB interest rate decision

Thursday 25 January: The euro area economy has grown little since Q3 2022, while inflation has slowed sharply since peaking at more than 10% in October 2022. The stage should therefore be set for interest rate cuts. However, the European Central Bank has insisted that rates must stay restrictive for as long as necessary to bring inflation under control. Consumer price inflation in the eurozone eased to 2.4% in the year to November, but ticked up to 2.9% in December, which may partly explain the ECB’s caution. That said, producer prices fell 8.8% year-on-year in November, the seventh consecutive month of deflation. Differences of opinion among officials on the rate-setting governing council could soon emerge, if cracks in the consensus aren’t already there. Certainly, no more rate hikes are expected. On Thursday the main ECB refinancing rate is likely to remain at 4.5%. But the economic data increasingly supports the idea of a rate cut sooner rather than later. Upcoming announcements – the first estimate of Q4 GDP is due at the end of January, followed by the January CPI reading on 1 February – could amplify calls for a March rate cut if economic growth remains anaemic and inflation continues to slow. Markets are currently pricing in four ECB rate cuts this year, to be made in quarter-point increments from June. This contrasts with expectations of six rate cuts from the US Federal Reserve this year, even though the US economy is in a much stronger position than the eurozone’s. 

US Q4 GDP

Thursday 25 January: Having grown 4.9% year-on-year in Q3, the US economy is likely to have grown at a slower pace in Q4 as interest rate hikes earlier in the year put the brakes on economic activity. Economists’ consensus estimates point to growth of about 1.9% to 2% in Q4, which would be the smallest increase since Q2 2022 when the US economy contracted by 0.6% Nonetheless, the economy remained resilient overall. The labour market was strong during the quarter and retail sales increased 0.3% and 0.6% month-on-month in November and December, respectively, after a contraction of 0.3% in October. 

Here's our pick of the week's other notable economic and company events:

Bank of Japan interest rate decision

Tue 23 Jan: Expectations of a Bank of Japan interest rate rise have diminished significantly in the last few weeks. The latest economic data have lent support to the idea that there is no rush to raise rates out of negative territory. Notably, recent inflation numbers have revealed an easing of price pressures, with a sharp slowdown in cash earnings in November. Furthermore, the weakening of the US dollar in recent weeks has helped ease the pressure on the BoJ. At its last meeting in December, Japan’s central bank kept monetary policy unchanged, but offered little guidance on their future intentions. That said, policymakers are still likely to try and begin the process of returning to a more normal monetary policy over the next few months, with rates expected to come out of negative territory in the first half of this year. Yields on Japan’s 10-year government bond have fallen from a peak of 0.97% in November to below 0.6% this month, while the two-year government bond is back at 0%, having been as high as 0.15%. 

Associated British Foods Q1 results

Tue 23 Jan: Primark owner Associated British Foods, whose shares gained 50% in 2023, will have been encouraged by recent trading updates from peers such as Next and Marks & Spencer. Their strong results are a reminder that, despite the high street’s struggles, retailers can still thrive if they sell products that customers want to buy. Since hitting 10-year lows in October 2022, ABF shares have risen more than 80%, though they remain below the pre-pandemic peak of February 2020. The shares have dipped slightly in the last few weeks over concerns that a lot of the good news may already be priced in. In November the retailer reported that full-year revenue had increased 16% to £19.75bn. Revenue from Primark grew 17% to £9bn, although adjusted operating margin fell to 8.2% from 9.8%. Higher sugar prices helped boost revenue from the sugar business by 26% to £2.55bn, though higher energy costs saw margins narrow to 6.6%. The grocery business was one of two areas where adjusted operating margins were stable, holding steady at 10.7%, as revenue rose 12% to £4.2bn. The ingredients business saw operating margins increase to 9.9%, as revenues increased to £2.15bn, helped by a strong performance from its yeast and bakery division. On the outlook, ABF said they expected operating margins in the Primark business to improve to above 10% in 2024 as inflation pressures ease. The retailer also announced another £500bn share buyback as well as a special dividend of 12.7p per share.

Netflix Q4 results

Tue 23 Jan: Before Netflix reported its Q3 results in October, its shares were under pressure amid investor concerns over the company’s future. Could Netflix compete with its deep-pocketed peers? Would its new ad-supported tier cannibalise its revenue base as users traded down to a cheaper package? Might the crackdown on password sharing prompt a slowdown in subscriber numbers? So far these have proved unfounded. Since the Q3 earnings beat, the shares have risen roughly 40% to $484, a two-year high. In Q3 subscribers surged to 8.76m, well above forecasts of 5m, pushing revenue up to $8.5bn. Profit came in at $3.73 a share, beating forecasts of $3.52. Total subscribers now sit at a record 247.15m, as Netflix continues to fend off its competitors of Disney, Paramount, and Amazon. Free cash flow rose to $1.89bn, as payment for new content fell due to strikes by writers and actors. Ad-supported membership rose 70% quarter-over-quarter, although it’s not immediately clear how much that area of the business contributed to revenue as Netflix hasn’t broken down the numbers. Operating margin expanded to 22.4%, with the streaming company raising its forecast for full-year operating margin to the top end of its 18% to 20% range. For Q4 Netflix says it expects to see revenue of $8.7bn, a rise of 11%, with net additions in line with Q3, although they said this could be affected by a $200m FX drag due to a stronger US dollar. Profits are expected to come in at $2.15 a share, a big increase on $0.12 a share in the year-ago quarter, due to lower spend on content, which in turn has helped improve cashflow. One other bonus is that bosses finally appear to have realised that they need to adopt an FX hedging strategy, given that 60% of their revenue is from currencies other than the US dollar. This proportion is likely to increase over time.

EasyJet Q1 results

Wed 24 Jan: When easyJet reported its full-year numbers in November, the announcement that the dividend would be reinstated helped drive the shares higher. Since then the shares have risen 18% to retest last year’s highs. That said, the easyJet share price remains down by more than half from its pre-pandemic peaks. The shares have also underperformed relative to peer Ryanair, whose shares gained almost 80% last year. Last year turned out to be a year of two halves for easyJet, with most of the annual profit made during the second half. This trend looks set to be repeated in 2024. EasyJet’s total revenue in 2023 rose 42% to £8.17bn, while costs grew 30% to £7.7bn, driven by rising fuel prices and higher costs in the easyJet holidays division. The airline’s load factor, a measure of bums on plane seats, rose to 89% last year, up from 86% in 2022, as it flew 82.8m passengers, a 19% increase. Airline revenue per seat rose to £ 79.84, up 21% year-on-year, slightly short of forecasts. For 2024 easyJet was optimistic, though it warned that the ongoing situation in the Middle East had led to the suspension of flights to Israel, Jordan and Egypt. The easyJet holidays business is projected to see 35% growth in 2024, taking its UK market share to 7%. Despite this, easyJet said it doesn’t expect to improve on the Q1 loss it reported last year. However, a pickup in the summer months in 2024 is expected to offset a slow start to the year. The airline has managed to add value across all its key areas, with strong gains in ancillary revenue and average revenue per seat. Bosses will be looking to continue to improve on that in 2024. The dividend was restored, with 4.5p a share to be paid in early 2024, which is 10% of the after-tax headline profit. The intention is to grow that to 20% in 2024 and 2025.

US Core PCE (December)

Fri 26 Jan: Ahead of the Federal Reserve’s 30-31 January meeting, markets continue to try and guess when the central bank will cut interest rates. The latest reading of the closely watched core personal consumption expenditures (PCE) price index is likely to help shape those bets. In November, the Fed’s preferred measure of inflation slowed to 3.2%, down from 3.4% in October, to reach its lowest level since April 2021. Consensus estimates of a further slowdown to 2.9% could, if proven correct, add to market expectations of a rate cut in March. However, the Fed is likely to be concerned that the market is getting ahead of itself. The headline rate of US consumer price inflation ticked higher to 3.4% in December, which could mean that March is too soon for a rate cut.

INDEX DIVIDEND SCHEDULE

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SELECTED COMPANY RESULTS

Note: While we check all dates carefully to ensure that they are correct at the time of writing, company announcements are subject to change.

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