Week ahead: Tesla earnings and ECB set to hike

Earnings season picks up pace on Wall Street with Tesla and Netflix reporting their latest financials alongside a number of Dow components. Meanwhile the European Central Bank is all set to raise interest rates for the first time in 11 years. 

ECB 

The European Central Bank (ECB) is set to raise rates for the first time in over a decade as it seeks to tackle spiralling inflation. At its June meeting, the ECB confirmed it would raise rates by 25bps in July and hinted at a 50bps move in September. Minutes from the meeting suggest the ECB could opt for a larger initial hike. “A number of members expressed an initial preference for keeping the door open for a larger hike at the July meeting,” the minutes said. However, most policymakers believe the first hike needs “to be prepared and explained carefully”, which would indicate a move of just 25bps. 

Meanwhile markets have scaled back their bets for how far the ECB will go this year and next. Nomura economists believe the ECB will lift rates by 175 basis points through to March, but looming recession means the central bank will be cutting this time next year. 

Markets will also pay close attention to the ECB’s anti-fragmentation tool, which it will be crucial to its ability to raise rates and normalise policy. The tool will be deployed to keep bond spreads in check as the ECB raise rates. Investors and the ECB will also be keeping a close eye on Italian politics this week with uncertainty about the Draghi government seeing Italian bond yields spike higher. 

Tesla 

A tough quarter for Tesla seems assured. Layoffs and supply chain woes suggest it’s not been a record-breaker. Tesla announced weaker-than-expected second-quarter vehicle deliveries of 254,695, its first sequential quarterly decline in two years, well below the 310,000 vehicles delivered in the first quarter, 

JPMorgan cut its Tesla price target to $385 from $395 on the news, stating: “Lower production in Shanghai due to factors outside Tesla’s control is likely the largest contributor to the production shortfall pressuring deliveries during the quarter.” Analysts believe Tesla will report a $1.3 billion decline in profit from the first quarter. Q2 earnings will also be negatively impacted by an expected write-down on Tesla’s Bitcoin holding. 

UK inflation 

The latest inflation data for the UK will be closely watched by sterling traders. GBPUSD has fallen to 2-year lows and markets are increasingly worried about the economic outlook. CPI jumped to 9.1% in May and is expected to continue rising before topping out around 10% later this year. Last week Andrew Bailey, the governor of the Bank of England, struck a more hawkish tone. He said the Bank will act “forcefully” if necessary and that he uses that word because “we want people to see that there are more options on the table than another 25 bps”. 

Earnings calendar 

Economic calendar (BST)