The Week Ahead - ECB and Bank of Japan, US Q4 GDP, easyJet, Tesla and Netflix results
- ECB rate decision – 25/01 – when looking at the economic performance of the euro area, we’ve seen little in the way of growth since Q3 of 2022, while inflation has also been slowing sharply. Yet for all this economic weakness the ECB has been insistent it is not close to considering a cut in rates, having hiked as recently as last September. In November headline inflation slowed to 2.4%, although did pick up again in December to 2.9%, while core prices slowed to 3.4%. This rebound in headline inflation while no doubt driven by base effects will be used as evidence from the hawks on the governing council that rates need to stay high, however there is already evidence that the consensus on rates is splintering, and while no more rate hikes are expected the economic data increasingly supports the idea of a cut sooner rather than later. Markets currently have the ECB cutting rates 4 times this year in increments of 25bps, starting in June. This contrasts with the market pricing 6 rate cuts from the Federal Reserve despite the US economy being magnitudes stronger than in Europe. No changes are expected this week with the main ECB refinancing rate currently at 4.5%, however Q4 GDP due at the end of the month, and January CPI due on 1st February calls for a March rate cut could start to get louder in the weeks ahead, especially since PPI has been in deflation for the last 6 months.
- Bank of Japan rate decision – 23/01 – expectations around a Bank of Japan rate rise have diminished significantly in the last few weeks, with the latest economic data lending support to the idea that there is no rush to raise rates out of negative territory. The weakness of the US dollar in recent weeks has helped ease the pressure on the BOJ in recent weeks, Recent inflation numbers have pointed to an easing of price pressures with a sharp slowdown in cash earnings in November. At its last meeting in December the BOJ kept monetary policy unchanged while offering little in the way of guidance as to their future intentions. That said the central bank is still expected to try and begin the process of 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. Since November the Japanese 10-year JGB has seen yields fall from a peak of 0.97% to fall below 0.6% at the start of this year. On the 2 year we are back at 0% having been as high as 0.15%. Could we see a rebound in the wake of this week’s policy announcement?
- US Q4 GDP – 25/01 – the US economy is unlikely to have grown at the same pace as it did in Q3 when we saw the economy expand by 4.9% with personal consumption accounting for 3.1% of that pickup after a weaker performance in Q2. Expectations for Q4 are for the economy to have slowed to an annualised 1.9% to 2%, which would be the weakest quarter of 2023, and the weakest since Q2 of 2022 when the US economy contracted by -0.6%. Nonetheless the resilience of the US consumer has been at the forefront of the resilience seen over the past 12 months, with a strong end to the year for consumer spending. Based on the continuing tight nature of the US labour market there is no reason to suppose this won’t have been maintained in Q4. Retail sales spending did pick up towards the end of last year after a weak October and consequently this week’s Q4 personal consumption number could be a weak spot, before getting revised higher in later iterations. The price index is also expected to slow from the 3.3% seen in Q3 to around 2%. A stronger than forecast number here could prompt markets to push back current market timing of the first Fed rate cut.
- US Core PCE (Dec) – 26/01 – with the US central bank due to meet next week markets have continued to try and finesses the timing of when the first Fed rate cut is likely to occur, after Powell’s surprisingly dovish shift when the central bank last met just before Christmas. This week’s PCE numbers are likely to be a key benchmark for markets after PCE core deflator slowed to 3.2% in November, slipping from 3.4% in October, and the lowest level since April 2021. A further slowdown to 2.9% which appears to be the consensus could see markets continue to build on the prospect of a rate cut in March, which took hold back in December. The bigger concern for some Fed officials is that headline CPI appears to be ticking higher again, which may make the last yards to 2% much trickier. This will be the Fed’s key concern over an early cut as it could reignite the inflationary pressures that have taken so long to get under control. This caution would suggest that March is too early for a US rate cut, and that the market is getting ahead of itself.
- Associated British Foods Q1 24 – 23/01 – as seen from recent updates from its peers like Next and Marks & Spencer the last few months have been solid ones for those retailers who sell products that customers want to buy. Both retailers saw decent gains in their respective share prices last year, and the same can also be said for ABF amongst whose brands Primark has been a key standout. Since the 10-year lows set back on October 2022, the shares have rallied over 70%, but are still below the peaks set back in April 2021. There does appear to have lost some momentum in the last few weeks, over concerns that a lot of the good news may already be in the price. When the retailer reported in November full year revenues saw an increase of 16% to £19.75bn, with the Primark business accounting for £9bn of that rising by 17%, although adjusted operating margins fell to 8.2% from 9.8%. Higher sugar prices helped to boost revenues in the sugar business by 26% to £2.55bn, however higher energy costs saw margins narrow to 6.6%. The grocery business was one of two areas that ABF managed to maintain its adjusted operating margins. These held 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 for 2024 to improve to above 10% as inflation pressures ease. The retailer also announced another £500bn share buyback as well as a special dividend of 12.7p per share.
- easyJet Q1 24 - 24/01 – the announcement of the return of the dividend back in November when easyJet reported its full year numbers appears to have been the catalyst for some solid share price gains with the shares retesting its 2023 highs earlier this month, having fallen to 10-month lows back in October. While welcome the easyJet share price has struggled to recapture the levels it was trading at in 2022 and 2021, when the shares hit ten-year lows. The underperformance has been even more marked when compared to that of Ryanair whose shares managed to retake their pre-pandemic peaks and hit record highs last year. In comparison easyJet shares are over 50% below their pre-pandemic peaks. Last year turned out to be a year of two halves, with most of the annual profit getting made during H2. This trend looks set to be repeated for 2024. A weak H1 followed by a strong H2. Total revenues for 2023 rose 42% to £8.17bn, while costs grew by 30% to £7.7bn, driven by rising fuel costs as well as costs arising from the growth in easyJet holidays. The load factor for 2023 rose to 89%, up from 86% in 2022 with the airline flying 82.8m passengers, a 19% increase. Airline revenue per seat rose to £79.84 a 21% rise on the year which fell slightly short of forecasts. For 2024 easyJet was optimistic, however the impact from events in the Middle East did prompt a modest reappraisal of the H1 outlook due 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%. Consequently, easyJet said it doesn’t expect to improve on the Q1 loss it experienced 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 and will be looking to continue to improve on that in 2024. The dividend was restored with 4.5p a share confirmed to be paid in early 2024, which is 10% of the after-tax headline profit with the intention to grow that to 20% in 2024 and 2025.
- Netflix Q4 23 - 23/01 – when Netflix reported in Q3 there was some doubt as to whether it would be able to compete with its deeper pocketed peers, as well as whether its new ad-supported tier would cannibalise its revenue base as users traded down to a cheaper package. Fears that the crackdown on password sharing would prompt a slowdown in subscriber numbers have thus far proved unfounded, with the shares up over 20% to 2-year highs, since those Q3 numbers were released. Q3 subscribers surged to 8.76m, well above forecasts of 5m, pushing revenues up to $8.5bn, while profits beat expectations coming in at $3.73 a share, above 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, while free cash flow rose to $1.89bn, as payment for new content was lower due to the writers and actors strikes. The ads business has also seen membership rise 70% quarter over quarter, although it’s not immediately clear how revenue accretive that area of the business is as Netflix haven’t broken down the numbers. Operating margins rose to 22.4%, with the streaming company raising its forecast for full year operating margin to the top end of the 18%-20% range. For Q4 Netflix says it expects to see revenues 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 effect drag due to a stronger US dollar. Profits are expected to come in at $2.15c a share, a big increase on the $0.12c a share from the same quarter last year, due to lower spend on content, which in turn has helped improve cashflow. One other bonus is that the penny finally appears to have dropped that they need to adopt an FX hedging program given that 60% of their revenue is non-US dollar based and is likely to increase over time..
- Tesla Q4 23 – 24/01 – since posting its Q3 numbers back in October the Tesla share price has chopped sideways falling to 5-month lows in the aftermath of those numbers, before rebounding. When CEO Elon Musk outlined his sales target for the whole of 2023 the ambition was to push total sales to as many as 2m vehicles. Tesla hasn’t been able to meet that goal, falling short at 1.8m after selling a new record of 484,500 EV’s in Q4 in numbers released earlier this month, with most of those being the Model 3 and Model Y. This has meant that share price progress in terms of further upside has started to stall as EV sales start to contend with increased competition, especially in China where it is having to compete with BYD who managed to sell 526k vehicles over the same quarter. Q3 revenues came in at $23.35bn 9% higher than the same quarter a year ago, however profits fell more than expected, by 37% to $2.3bn of $0.66c a share. Operating expenses rose 43% to $2.4bn, reducing margins to 7.6% from 17.2% a year ago, largely due to investment in Cybertruck and AI. While total automotive revenues rose 5% the main growth area came from Tesla’s energy generation business which saw revenues rise 40% to $1.56bn, while services grew 32% to $2.16bn. Energy generation will be a key area of revenue growth as electric vehicles become more mainstream with pay per use supercharging points likely to drive profits going forward, with the company looking to ramp up its charging infrastructure. Deliveries of the first batch of the Cybertruck also began during the quarter from its Austin facility in Texas, with the initial aim of 125,000 capacity. Consensus forecasts for Q4 revenues are in the region of $25.6bn, although the various price cuts during the quarter could mean we fall short of expectations, while the shutdown of the Berlin factory for two weeks due to a lack of parts caused by disruption in the Red Sea which is delaying the delivery of important components in the construction of its vehicles could hit revenues in Q1. Annual revenues are expected to come in at $97.3bn. Automotive gross margins will be a key area of focus as these are expected to fall below 20% for the first time, down from 28.5% a year ago, as higher production costs in the form of higher salaries for its US staff announced recently as well as recent price cuts start to bleed further into its estimates for fiscal year 2025.
Author
Michael Hewson MSTA CFTe
Independent Analyst
Award winning technical analyst, trader and market commentator. In my many years in the business I’ve been passionate about delivering education to retail traders, as well as other financial professionals. Visit my Substack here.
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