ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Heightened concerns. Stocks tumble after the Federal Reserve said it’s worried about growth and the global economy. But is the central bank’s ability to fix things limited?
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Flying low. Boeing (NYSE:BA) doesn’t expect to deliver as many jets this year as it did last and that has shareholders nervous.
HERERA: Cash advance. No ATM card, no problem — as long as you have your smartphone. The new way people are accessing their accounts.
All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, January 27th.
MATHISEN: Good evening, everyone, and welcome.
The Fed is on hold. Today, the U.S. Central Bank citing lower economic growth and inflation expectations kept interest rates right where they are — near historic lows.
But it was less what the Fed did or didn’t do, and more what it said and didn’t say that got investors’ attention today. It said, among other things, it was monitoring global economic and financial events and watching how they might affect our job market and inflation. And uncharacteristically, it deleted any reference to how it assesses the balance of risks to the U.S. economy, a sign, say some Fed watchers, that Janet Yellen and friends are a little more worried than they were just six weeks ago.
And those renewed concerns pressured stocks, so did the fact that the Fed didn’t explicitly take a rate hike off the table for March when it meets next.
The Dow Jones Industrial Average dropped 222 points to 15,944. The NASDAQ fell 99. The S&P 500 lost 20.
Hampton Pearson has more now on what’s worrying the central bank.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The first Federal Reserve meeting of 2016 ended with monetary policymakers keeping interest rates unchanged but pledging to closely monitor the global economy and financial markets.
Since the mid-December rate hike, major markets and oil prices have declined and China’s economy has struggled. The initial market reaction was negative because monetary policymakers gave no hints they plan to slow future rate hikes.
BILL GROSS, JANUS PORTFOLIO MANAGER: 2016 levels of global leverage make it very hard in my opinion to emphasize 5 percent unemployment when oil and commodity prices are deflating by 50 percent year over year.
PEARSON: The Fed said while overall economic growth has slowed, labor markets have improved, but the drop in oil prices and stronger dollar finds policymakers no longer reasonably confident the Fed can reach its 2 percent inflation target over the next few years.
Some analysts say that continued strong job growth leaves the door open for a rate hike in March.
ANIKA KHAN, WELLS FARGO SECURITIES: I don’t think the fed has changed their playbook. Labor market conditions are still solid, and if we continue to see improvement, the Fed will still consider a rate hike.
BRIAN BELSKI, BMO CAPITAL MARKETS: Fed has a bit of a credibility problem because they probably waited too long to raise rates in the first place. Now they have to stay on course for a while.
PEARSON: Two weeks from today, Fed Chair Janet Yellen will have a chance to address those market concerns when she reports to Congress on the economy and monetary policy.
For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.
HERERA: Let’s turn now to Randy Kroszner, for more analysis on the Fed and the economy. He’s a former Fed governor and now a professor of economics at the University of Chicago’s Booth School of Business. Also a frequent and welcomed guest here on NBR.
Randy, good to see you again.
RANDY KROSZNER, FORMER FED GOVERNOR: Great to be with you.
HERERA: What do you make of what the fed did or perhaps better said did not do today, and the market’s response to it?
KROSZNER: So I thought it was very interesting that they no longer said the risks are balanced on inflation and growth. They took that phrase out suggesting they’re a little bit more concerned and so that would suggest to me that unless we see some inflation outbursts which would seem extremely unlikely they’re not going to seriously consider a rate hike in March and I can’t really see it even being seriously considered before June.
MATHISEN: So that would really mean that really they’re on hold for much of the first half of this year. One of the things they did sort of reinsert into their statement was a reference to global economic and market conditions. They had dropped that in December after having it in, as I recall, in September.
Does this suggest to you that that’s a major factor in their decision making?
KROSZNER: I wouldn’t say it’s a major factor, but they have to be cognizant of it. What they’re going to do is figure out what is driving the markets? They’re not just reacting to the markets because if you react to the markets predict something like ten of the last three recessions. So, you have to be careful of responding when the market moves. What they’re going to try to see is what’s behind this. Is it something that is telling about slower growth going forward, or fragility coming from China?
And so, they’re going to take, just as they did, a pause in September. They didn’t make the move then. They waited until December. And so, they want to see what will be the, you know, whether they can kind of get behind what’s moving the markets now.
HERERA: You know, Randy, I was also interested that although they can’t really see inflation in the pipeline, they didn’t seem to be all that concerned with the decline that we’ve seen in crude oil which many people are calling deflationary at this point. I found that curious.
KROSZNER: Well, they said they’re going to be monitoring the inflation issues very closely as they always say. They did note that inflation expectations, at least market-based measures have come down, have declined recently. If you look back to the December statement, they said that they remained low, so they were low and now they’ve come down.
So, it becomes much more difficult for the Fed to say, a-ha, inflation is rising, when market expectations are coming down and we’re not seeing much evidence of that. So, I think they didn’t want to explicitly the specifics of oil but they did certainly acknowledge that inflation expectations to move down.
MATHISEN: Quick thought, we seem to have a rather muddling economy. The hedge fund manager Ray Dalio said that from where he sits he’s not quite sure the Fed has the weapons it might traditionally deploy to give the economy a jolt if it needs to. Do you agree?
KROSZNER: Well, you know, the Fed brought rates down to zero and still was able to do more through asset purchases and that’s why the Fed’s balance sheet is now over $4 trillion. That said, quantitative easing, those asset purchases does have a diminishing effect over time. But monetary policy is not the only game in town. It’s a necessary condition to have to avoid both deflation and high inflation, but to get the economy going — you need a lot more than that.
You need to have business confidence and given the uncertainty on the fiscal side, uncertainty on the regulatory side, particularly during this political season, that’s what you really need to resolve to get growth going.
HERERA: All right. Randy, we’ll leave it there. Thank you so much for joining us. Randy Kroszner with the University of Chicago Booth School of Business.
MATHISEN: Well, the Fed wasn’t the only reason stocks fell. Investors were also reacting to weak outlooks from two Dow components, Apple (NASDAQ:AAPL) and Boeing (NYSE:BA). As we reported last night, Apple (NASDAQ:AAPL) is now forecasting a decline in revenue in the current quarter and says iPhone sales grew at the slowest pace since the device’s introduction.
And Boeing (NYSE:BA) also issued a gloomy earnings forecast for the year. Both stocks fell sharply. Apple (NASDAQ:AAPL) was off 6 1/2 percent, while Boeing (NYSE:BA) fell nearly 9 percent.
HERERA: And that move in Boeing (NYSE:BA) was its worst since 2001. But what’s behind the aerospace company’s weak forecast?
As Phil LeBeau reports, a lot of it has to do with the number of commercial airplanes it plans to deliver.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Despite a record backlog of orders, Boeing’s delivery of new airplanes is slowing down for the first time in six years. The decline is not huge, dropping from 762 planes last year to between 740 and 745 this year.
What’s changed? One factor is the transition to a new version of the 737, Boeing’s most popular plane. The company plans to build 42 737s every month. But with new engines and wings featuring winglets on the tip to save on fuel, the 737 Max is a different plane.
Boeing (NYSE:BA) says that means the first versions of the Max will include test planes and about a dozen models that will go into inventory and not be immediately delivered. In addition, Boeing (NYSE:BA) will be shipping fewer of the 747 jumbo jets.
But in a year when Airbus is increasing deliveries, investors are asking, why isn’t Boeing (NYSE:BA) doing the same thing? More importantly, is this delivery dip just a hiccup or indicative of a broader slowdown in commercial airplanes?
Boeing (NYSE:BA) CEO says after pausing this year, deliveries and profits will pick up in 2017.
DENNIS MUILENBURG, BOEING CEO: You’ll see deliveries will grow as we execute on the backlog. And so, just stepping back from a year of transition and looking out to 2017, 2018, you’ll see revenue growth, you’ll see earnings growth. You’ll see cash growth. We remain very confident in that story.
LEBEAU: Boeing (NYSE:BA) says demand for commercial airplanes remains strong not only in the near term but looking out over the next 20 years, which is why the company is dramatically increasing 737 production in 2017 and again in 2019.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
MATHISEN: Fellow Dow component United Technologies (NYSE:UTX) reported a decline in revenue against all for of its divisions. The maker of jet engines, Otis elevators said it was hit by a strong dollar and restructuring cost, but it topped analysts’ earnings estimates, reaffirmed its forecast for the year and said it would continue cutting costs and that sent shares higher albeit by just a little bit on this down market day.
HERERA: Oil, of course, has been a headache for the market. You know the pattern. When crude prices fall, stocks follow, and vice versa.
But today, there was a break in that trend. And on this down market day, oil prices rose on talk of potential production cuts. According to reports, Russia hinted at the possibility of cooperation with OPEC to cut back on supply. And that sent prices more than 2.5 percent higher to settle above $32 a barrel.
The prices are still historically low. And while that’s bad news for the energy industry, it’s good news for a number of states, sectors, and companies.
Dina Gusovsky takes a look at who benefits.
DINA GUSOVSKY, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you’re filling up these days, these prices look mighty fine.
UNIDENTIFIED FEMALE: It’s a blessing. We do more traveling being that the gasoline is a lower price now.
GUSOVSKY: Most folks haven’t seen gas this cheap since around 2008. So, why are many people talking about the negative consequences of oil? Well, the stock market doesn’t like it.
UNIDENTIFIED MALE: For many, of course, oil remains the eye of the storm.
GUSOVSKY: And some of the biggest companies are losing money as a result. But there’s upside to low oil as well.
KURT KRUMMENACKER, MOODY’S INVESTORS SERVICE VP: Low oil prices benefit the transportation infrastructure sectors, specifically, that’s airports, seaports and toll roads. The key benefit is that it increases the propensity to travel for toll roads and reduces the costs for airlines and shipping lines to move goods or people from one location to another.
GUSOVSKY: Though oil-producing states like Alaska, North Dakota, Texas, and Louisiana are the hardest hit by the oil slump, on the flip side of that, if you’re in New York, Florida, Illinois, even California and many other states, there are a lot of benefits from low oil prices. And for sectors like transport that includes airlines, trucking companies, fast food companies and lower end retailers, cheap oil and gas is a good thing.
States that see a lot of tourism and regions with industries that are dependent on buying fuel for everyday business activities, even farmers are reaping the benefits of low oil.
JOHN KILDUFF, AGAIN CAPITAL PARTNER: Companies across the spectrum that are consumer based are benefiting. The autos like GM and Ford who had record sales years. The retailers like Walmart, Macy’s (NYSE:M), who have seen better results now as consumers finally spend that gas savings, Royal cruise lines, Carnival (NYSE:CCL) cruise lines, and even Walt Disney (NYSE:DIS) World, as people finally have the money saved and are able to go on vacation and spend these gas savings.
I’m in disbelief that this could be considered a negative for the U.S. economy, an economy that’s 70 percent the consumer, a consumer that’s saving $700 million a day compared with what they were spending on gas about two or three years ago.
GUSOVSKY: But not everyone agrees.
DANIEL DICKER, THESTREET.COM SR. CONTRIBUTOR: We haven’t seen the bump I thought or most economists would see, for example, in retail or in restaurants. A lot of those stocks have been doing just as badly with gas down at $2 or under $2 a gallon as it was doing before. Most people like to whine about gas prices when they go above, let’s say, $4 a gallon, but it really doesn’t affect how much gas they buy, demand doesn’t change all that much.
GUSOVSKY: Tell that to these people.
UIDENTIFIED MALE: I like to travel a lot now. I can save money on gas, why not travel? It’s easy to fill up your tanks sometimes.
GUSOVSKY: For NIGHTLY BUSINESS REPORT, I’m Dina Gusovsky.
MATHISEN: Got that right.
All right. There’s an app for that, coming to a bank or street corner near you. ATM machines that use smartphones, not cards, to let you get cash.
MATHISEN: There was a rush to buy new homes last month. The Commerce Department reports that sales rose nearly 11 percent in December. That’s the strongest pace in ten months. Sales of new homes accelerated throughout 2015. Thanks to steady job growth and low mortgage rates.
HERERA: From the world’s largest economy to the second largest, China. Secretary of State John Kerry was in that country meeting with high-level officials to discuss global and regional issues, including North Korea.
Eunice Yoon reports from Beijing.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Secretary of State John Kerry ended a two-day visit to Beijing. Kerry came here with the hopes of securing further commitment from China to pressure North Korea from developing nuclear weapons. China is a key ally of the North Korean regime which recently claimed to have tested the hydrogen bomb in early January.
The two sides agreed on the need of a U.N. resolution condemning North Korea’s nuclear tests. However, after hours of discussions with his Chinese counterpart, Foreign Minister Wang Yi, Kerry failed to convince China to support additional sanctions on Pyongyang.
JOHN KERRY, SECRETARY OF STATE: We need to reach consensus on a strong U.N. Security Council resolution, but we have yet to fill out the parameters of exactly what it will do or say.
YOON: Kerry also discussed the need for the U.S. and China to reduce tensions in the South China Sea. China claims most of that body of water and has antagonized its neighbors, many of them who dispute China’s rights. The U.S. believes a settlement over those waters should be handled with diplomacy.
For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Beijing.
HERERA: Separately, the man in charge of China’s economic data is under investigation. The communist party’s anti-corruption commission said late last night that it is looking into serious violations. The commission did not release any further details.
But for years, many have questioned the reliability of China’s economic data although it is unclear if this probe is related to his current position as head of China’s statistics bureau.
MATHISEN: Facebook’s quarterly revenue surpasses $5 billion for the first time ever. And that is where we begin tonight’s “Market Focus.”
The social networking company’s earnings more than doubled as advertising sales increased more than expected. The company also benefiting from a surge in video views. That sent shares up initially in after-hours trading, that’s the green part of the line, folks. The stock finished the regular session 3 percent lower at $94.45.
EBay shares, meanwhile, came under pressure late today after the online auction site warned first-quarter profits will come in below expectations. Also reported, its fourth straight quarter of declining year over year sales. Shares dropped sharply in after-hours trading. That’s the red part of that line. EBay finished the regular session down fractionally at $26.42.
And, PayPal, which was spun off from eBay (NASDAQ:EBAY), posted better than expected results. The payment processer said it added customers and processed more payments. PayPal also announced a $2 billion stock buyback program. Shares rose sharply in after-hours trading and it finished the regular session with a fraction of decline at $31.59.
Biogen beat earnings and revenue targets because of strong sales of its oral multiple sclerosis drug. Overall, revenue was up more than 7 percent. The biotech firm also issued its 2016 outlook. That was in line with estimates. Shares up 5 percent to $273.26.
HERERA: Tupperware (NYSE:TUP) cited a weaker global economy and strong dollar for a worse than expected sales drop and an earnings miss. The maker of household storage products gets more than 70 percent of its revenue outside the United States. As a result, Tupperware (NYSE:TUP) sees 2016 profit below street forecast as it battles what it calls economic and political headwinds. Shares fell nearly 15 percent to $43.97.
Health insurer Anthem said its profit fell more than 60 percent in its later quarter, weighed down by costs from its Affordable Care Act public exchange plans. But the company also said it had momentum heading into 2016 with more people enrolling in its Medicaid plans and that it would be helped by the pending acquisition of Cigna. Shares of Anthem were off about 5 percent to $131.23.
Norfolk Southern (NYSE:SO) said that its profit fell 30 percent on lower freight volumes. Coal, in particular. The railroad also said it will shed 1,200 jobs this year and 2,000 in total by the year 2020, as part of a five-year cost cutting plan. The move comes as Norfolk Southern (NYSE:SO) tries to fend off a $28 million takeover bid from its rival, Canadian Pacific. Shares of Norfolk today up more than a percent to $69.89.
The Federal Trade Commission is suing the parent company of DeVry (NYSE:DV) University, alleging the company deceived students about job prospects after graduation. In addition, the Department of Education, which has been cracking down on for-profit schools recently said it ordered DeVry (NYSE:DV) to stop making certain claims about its graduates’ employment or risk losing federal student loan money. Shares of DeVry (NYSE:DV) Education Group fell 15 percent to $20.09.
MATHISEN: Withdrawing cash from your bank account used to mean waiting in line for a teller, then it meant using your ATM card.
Now, as Kayla tells us, JPMorgan (NYSE:JPM) wants it to be as simple as downloading an app.
KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: We’ve got smartphones, smarthomes, smartwatches and now, your ATM is getting smarter, too.
BARRY SOMMERS, JP MORGAN CHASE, CEO CONSUMER BANKING: We view this as much broader than a cash dispenser.
TAUSCHE: JPMorgan (NYSE:JPM) Chase, the country’s largest bank, is overhauling its 18,000 ATMs and soon you won’t need a card to use them. At the e-ATM launching later this year, it won’t matter if you left your wallet at home, just log into the Chase app, find the seven-digit code and type it into any Chase ATM in your vicinity.
It’s one of hundreds of features brainstormed at the bank’s innovation center in Columbus, Ohio. Some ideas like a fingerprint scanner got left on the cutting room floor. But others are getting put into practice, the ability to withdraw three times more money and more denominations.
Customers can now take out up to $3,000 in one dollar bills if they like. By the end of next year they’ll be able to pay mortgage and credit card bills standing at one of these machines, too.
SOMMERS: We do all this because our customers are asking for this. They want to bank where they want, when they want and how they want. This machine is allowing us the flexibility to do so.
TAUSCHE: It’s not just Chase customers. Bank of America (NYSE:BAC) is making its machines mobile friendly and Citigroup’s ATMs may soon scan your iris for identification. The upgrades over the years have made the machines more popular among customers than visiting a teller and cheaper for the bank, too.
Every teller transaction costs the bank 65 cents. That figure drops to 8 cents at an ATM and just 3 cents on your mobile device. Companies investing in changes say they are worth every penny.
For NIGHTLY BUSINESS REPORT, in New York.
HERERA: Straight ahead, the great space race. What Boeing (NYSE:BA) is doing that it’s never done before with some help from taxpayers.
HERERA: Toyota (NYSE:TM) is the world’s bestselling automaker for the fourth straight year. The company sold more than 10 million vehicles globally in 2015. More than number two, Volkswagen, and number three, General Motors (NYSE:GM). Strong demand in North America helped Toyota (NYSE:TM) sales while Volkswagen was hurt by its emission-cheating scandal. Together, Toyota (NYSE:TM), Volkswagen and GM account for roughly a third of all worldwide sales.
MATHISEN: Fiat Chrysler issuing a strong sales forecast for its Jeep brand. The automaker says sales will nearly double to 2 million worldwide by 2018. The company cites low gas prices for the upbeat outlook and says it believes those low prices will be permanent in the U.S. and more customers will gravitate to SUVs as a result.
HERERA: As we reported a little earlier in the program, Boeing (NYSE:BA) shares had a tough day following its earnings report but the company is also quietly working on a project like nothing it’s ever done before. It is building the world’s most powerful rocket.
Jane Wells has the story from New Orleans.
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2016 is big for space. Blue Origin, a company owned by billionaire Jeff Bezos, just landed the same rocket a second time. Billionaire Elon Musk almost succeeded in landing one of his SpaceX rockets on a floating barge in high seas.
These private space ventures by men with money are exciting and popular. Meantime, Boeing (NYSE:BA) is quietly building something completely different. Not for itself, but for NASA.
FRANK MCCALL, BOEING SLS PROGRAM: The space launch system is the biggest most powerful rocket that we’ve ever built.
ANNOUNCER: Three, two, one.
WELLS: The space launch system, or SLS, will someday take humans to Mars, if all goes according to plan and taxpayers keep willing to fund it. Boeing (NYSE:BA) is building the rocket’s core for NASA, which will stand 200 feet tall and measure nearly 28 feet wide.
TONY CASTILLEJA, BOEING SYSTEM ENGINEER: So, 8.5 million pounds of thrust. That’s 31 747s at full power. That’s going to be the first version of this rocket.
WELLS: The first test flight is slated for 2018 and it could be crewed with humans around 2021. The SLS is being welded with a new system which cuts down on weight and it’s the first rocket to be pieced together vertically.
JACKIE NESSELROAD, SLS FACTORY MANAGER: What you’re looking at is the largest welding system in the world.
WELLS: It’s not cheap. NASA is spending $2 billion this year on SLS and the program could cost nine times that.
But why does NASA need to own this rocket? Why doesn’t it just contract out to some private company’s rocket, use theirs like it’s doing with cargo shipments to the space station?
Well, no company is going to invest in building a rocket this big when NASA is the only customer. There’s no commercial market for it — yet.
MCCALL: Here in the lab, we got the rocket turned upside-down.
WELLS: The hope is to do something incredibly expensive as inexpensively as possible. Boeing (NYSE:BA) has decided that means combing new with old. The first SLS rockets will use solid rocket boosters and engines from the space shuttle days.
MCCALL: Well, I would say there’s a place for new things. There’s also a place for proven, reliable things. And things that we haven’t had. Why reinvent the wheel if the wheel works?
WELLS: The good news for NASA: Americans are currently infatuated with space again. Congress has given the space agency more money than it asked for in 2016. Whether that support will continue over the next 20 years that it will take to get to Mars is too far over the horizon to see.
For NIGHTLY BUSINESS REPORT, I’m Jane Wells.
HERERA: To read more about Boeing’s most powerful rocket ever made, head to our website, NBR.com.
MATHISEN: And before we go, let’s take another look at the day on Wall Street, if you dare. The Dow lost 222 points following the release of the Fed’s statement on the economy. NASDAQ was off 99. The S&P 500 down 20.
HERERA: By the way, welcome back from Chicago.
MATHISEN: Thank you.
HERERA: From the Morningstar (NASDAQ:MORN) conference.
MATHISEN: Very pleasant day out there. Love Chicago.
HERERA: It was terrific. Great city.
All right. That does it for NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for much for joining us.
MATHISEN: And I’m Tyler Mathisen. Thanks from me as well. Have a great evening, everyone. We’ll see you back here tomorrow night.