Transcript: Nightly Business Report – July 6, 2016

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: A Fed divided. Officials at the Central Bank disagree over the path of interest rates as the outlook for the economy grows increasingly cloudy.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: How safe is safe? From treasuries to utility, investors are plowing money into so-called safe havens for protection, but are they more risky than you think?

HERERA: Ship shape. Why West Coast ports are spending a lot of people to fend off the East Coast competition.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, July 6th.

MATHISEN: Good evening, everyone, and welcome.

Well, today, we found out what happened behinds those closed doors at the Federal Reserve’s last meeting, a sharp slow down in job growth and risks surrounding the then-upcoming U.K. vote on its membership in the European Union changed the thinking on interest rates at the Fed. Not long before the June gathering, many expected the central bank to hike rates. But a lot happened in the weeks and days leading up to that event, the growth outlook for the U.S. economy downgraded, and now with the release of meetings’ official minutes, we know that the change in outlook caused some sparring inside the world’s most powerful central bank.

Eamon Javers has more on the Fed’s last roundup and the rate hike that didn’t happen.

(BEGIN VIDEOTAPE)

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: The committee thought it would be prudent to wait for the outcome of what was then the upcoming Brexit referendum before deciding on whether or not to raise interest rates. The consensus was that the Brexit vote could generate financial market turbulence that could adversely affect domestic economic performance and that is exactly what ended up happening.

Now, jobs were the other area of uncertainty. Almost all the participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market. And even so, many remarked that they were reluctant to change their outlook materially based on one economic data released.

Most participants judged that in the absence of significant economic or financial shock, there would have to be more economic growth, job gains and inflation above 2 percent to warrant an increase. Now, however, several expressed concern that a delay in resuming further gradual increases in the funds rate would increase the risks to the financial stability or would raise the potential for overshooting the committee’s objectives.

And some other participants were uncertain whether economic conditions would warrant an increase in the target rate for the Fed’s funds rate. Also, several participants expressed concern that the committee’s communication themselves had not been fully effective in informing the public how incoming information affected the committee’s view of the economic outlook, its degree of confidence, in the outlook or the implications of the trajectory of monetary policy.

For NIGHTLY BUSINESS REPORT, I’m Eamon Javers in Washington.

(END VIDEOTAPE)

HERERA: So, what might today’s newly released FOMC minutes be telling us about the Fed and any decision on the future of interest rates?

Let’s find out from Ellen Zentner. She’s the chief economist at Morgan Stanley (NYSE:MS).

Welcome, Ellen. Nice to have you here.

ELLEN ZENTNER, MORGAN STANLEY CHIEF ECONOMIST: Thank you.

HERERA: I see from your notes that you have the FOMC moving to the sidelines until further notice. What was it about the minutes and the events surrounding that meeting that has you convinced that may not move anytime soon?

ZENTNER: Well, I think we have to look at even before the U.K. referendum, what was the environment we were operating in. We seem to be moving into the late phase of the business expansion, with credit turning, earnings under pressure, job growth slowing.

This was the environment facing monetary policymakers even prior to the U.K.’s vote to leave the European Union. After that vote, it only piled uncertainty on top of uncertainty, and when the word “uncertain” prevails or in an uncertain environment, monetary policymakers sit on their hands. They sit and they wait for further evidence. I think what we’re reading into these minutes is that deep down, they aren’t that convinced that there are better days around the corner.

So, that means we think that they move to the sidelines for a prolonged period.

MATHISEN: So, did the Fed miss the moment to raise, Ellen?

ZENTNER: Well, I think we have to ask ourselves what was that moment. Inflation is below the Fed’s 2 percent goal and has been way for eight straight years. This certainly cannot be described as an economy that’s headed towards overheating, which is typically when we like to raise interest rates. You’re raising interest rates to slow the economy.

So I’m not sure we can say the moment was even there, for them to pass up. I don’t think there’s ever been a compelling moment for them to raise interest rates.

MATHISEN: You know, I know they’ve mentioned the Brexit vote. And that they want to see how that plays out. That could take some time. I mean, they haven’t even really put in place some of the mechanisms to leave the European Union. So, the fed might have to wait a long time to see what the fallout is.

ZENTNER: Well, exactly. And our U.K. economists believe that there is going to be a very prolonged period of uncertainty around just how far reaching could the global impacts from the so-called Brexit be. And that is something that the Fed has to weigh. They have to ask themselves how confidence are we in that environment in the outlook and how much data do we need to convince us that it’s time to again further raise rates.

Janet Yellen, chair of the FOMC, has been clear that when they are close to the zero lower bound, they have to take into account that there are asymmetric risks to raising rates too soon or too quickly. Meaning that when you’re already close to zero, you better be extremely cautious in how you proceed. And so, that’s why we believe we are just going to see the Fed sit on the sidelines for quite some time.

HERERA: Ellen, thank you very much.

ZENTNER: Thank you.

HERERA: Ellen Zentner with Morgan Stanley (NYSE:MS).

MATHISEN: Fed Governor Dan Tarullo says he wants to see more evidence in inflation before raising interest rates the next time. Tarullo, who has a vote at every Fed policy meeting, said the approach made sense following Britain’s vote to leave the E.U. Speaking in Washington, he said it may be some time before it’s clear how that vote will impact different economies and he described the current economic environment as — you guessed it — uncertain.

HERERA: And tie that uncertainty is playing out in U.K. property funds. Following the Brexit vote, investors grew concerned about the outlook for U.K. commercial property values. As a result, owners of U.K. property funds asked for their money back.

Today, three more funds halted redemption, bringing the total to six. That means more than half of Britain’s property investment sector has been frozen. Unlike stock funds, these types of funds cannot quickly liquidate their holdings to meet redemption.

MATHISEN: The U.S. trade — in the U.S., the trade deficit in May hit a three-month high, strong demand for imports like cell phones and furniture increased the deficit by 10 percent. The nation’s trade gap climbed to more than $41 billion. The stronger dollar and sluggish growth abroad will likely remain a drag on U.S. exports. A separate report shows the economy services sector expanded by the fastest pace in seven months. The ISM services index came in much stronger than expected for June. Experts consider that a positive sign for the economy.

HERERA: On Wall Street, stocks erased early losses after falling more than 120 points. The Dow Jones Industrial Average started rallying mid-morning as bond yields came off of their record lows. The major averages then picked up steam after the release of the Fed minutes, which show the Central Bank is in no rush to raise interest rates. The blue chip Dow index rose 78 points to 17,918, the NASDAQ added 36, the S&P 500 gained 11.

MATHISEN: Despite today’s rise, a major bank expects a stock market pullback. Goldman Sachs (NYSE:GS) says it sees a near term selloff of between 5 percent and 10 percent. The bank cites a number factors, including elevated valuations in the market, decelerating stock buybacks, and growing political uncertainty that could result in market weakness over the next three months. It’s not all bad. After the pullback, Goldman Sachs (NYSE:GS) expects a recovery that would take the S&P 500 back to current levels by year end.

HERERA: Another bank, this one, Bank of America (NYSE:BAC), says retirement plans will likely put more money into treasuries. Even as prices rise and yields fall to record lows. If the $3 trillion U.S. corporate pension industry follows through, that could depress yields even further. Bank of America (NYSE:BAC) is calling for a yield of 1.25 percent on the 10-year note by the end of September. Recent forecasts for rising rates have proven wrong as economic growth remains tepid and inflation remains below the Fed’s target.

MATHISEN: With investors searching for yield and income, many are piling into so-called safe havens like the utility and telecom sectors for protection. But are they as safe as you think they are? And in this environment, can you really get both safety and return?

Brian Jacobsen is chief portfolio strategist at Wells Fargo (NYSE:WFC) Funds and he joins us now to discuss.

You know, Brian, it seems to me, as so many pile into what we called those safe havens, where there’s treasury bonds or utility shares, or more broadly, dividend-paying stocks, the prices of those assets become very high, so they lose their safety advantage.

BRIAN JACOBSEN, WELLS FARGO FUNDS CHIEF PORTFOLIO STRATEGIST: Yes, that’s absolutely right. And that’s actually one of the ironies of investing, is that when everybody perceives something to be very safe, they tend to beat up the price to the point where it’s no longer safe as what everybody thought.

And I think that’s the situation that you have with a lot of treasury securities that are out there, especially if you look further out in what we had called the yield curve, something along like ten years to 30-year treasuries. Those yields are just not very compelling. In many cases, it doesn’t even compensate you for expected inflation over whatever the maturity of those securities are.

Then you look at you utilities and telecoms, sure, they can generate income for you, but where’s the growth? If you suddenly have an increase in interest rates and prices drop for those securities, whatever you gained in income, you might lose in price declines.

HERERA: Yes. So, where is the alternative then to treasuries? Maybe even to gold or something like that? I see you like short-term high wield. Would you look in the debt market, the corporate debt market for that?

JACOBSEN: That’s correct. Actually, that’s one of my favorite areas for investors who are looking for income, and if you’re afraid what happens if interest rates stay where they are, maybe go lower or if interests go higher, you want to try to beat inflation. And in order to beat inflation, let’s say if it comes in at 1 1/2 to 2 percent over the next year, next few years, set that as your bogey and look for yields that are higher than that.

But you don’t necessarily want to stretch too far in terms of taking on too much credit risks because that’s the trade off here. Life is filled with tradeoffs. You either expose yourself to that interest risk where if rates rise, you can lose some money, or you expose yourself to credit risk where if defaults increase, you could lose money.

So, I think that sweet spot right now, a short-term high yield debt in that area, I think credit quality is very good and you can at least get 3 to 4 percent, which is a lot better than 1.37 percent on a ten-year treasury and only half of a percent on two-year treasuries.

MATHISEN: Two quick questions, hopefully quick answers. Is gold a safe haven or just a hedge? That’s number one. And number two, I see you like European dividend paying stocks. Another investment advisor I spoke to earlier today said the same thing because the prices are cheap and the yields are hire. Can you get them through an ETF?

JACOBSEN: Well, I think that as far as gold — gold, you have to remember, is volatile. It goes up and down just like everything else. Historically, it has quite a bit more volatility than stocks. So, don’t perceive it as a safe haven.

I think that in terms of my favorite area, as far as the equity side, look for dividend paying European equities. The valuations are very low. I think people have thrown the baby out with the bath water here with the Brexit vote for European equities and there’s some good bargains for you to find.

MATHISEN: All right. Brian, thank you very much. Brian Jacobsen with Wells Fargo (NYSE:WFC) Funds.

HERERA: Still ahead, are revolutionary changes coming to the media industry. One of the most influential names in the business says yes.

(MUSIC)

HERERA: FBI Director James Comey will testify before the House Oversight Committee tomorrow. The topic, his recommendation that charges not be brought against Hillary Clinton and the use of her private e-mail server while secretary of state. The chairman of the committee says the American people have the right to understand the depth of the FBI’s investigation.

MATHISEN: Donald Trump’s presidential campaign is making a financial comeback. The likely Republican nominee raised more than $50 million in June. That’s more than 16 times what it raised in May. The campaign says slightly more than half of the money raised came from its digital and small dollar operation with the help of the Republican National Committee. But in comparison, nominee Mitt Romney raised more than $100 million in June of 2012.

HERERA: As Donald Trump ramps up his antitrade rhetoric, the West Coast ports are paying close attention to the changes underway at the Panama Canal. As we’ve been reporting, the Panama Canal is now wider and can handle a lot more shipping traffic. And with billions of dollars on the line, West Coast ports are making their own changes to fend off competition by the ports on the East Coast.

Jane Wells reports tonight from Long Beach, California.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: A hundred and two years after becoming one of the wonders of the world, the Panama Canal has gotten some work done, over $5 billion worth, to accommodate bigger ships from Asia and no one is watching more closely that America’s largest container port complex in Southern (NYSE:SO) California.

JON SLANGERUP, PORT OF LONG BEACH CEO: We are the fastest route from Asia to the middle markets of the United States, simply that.

WELLS: Even so, the Long Beach and Los Angeles ports have lost some business. Billions of dollars and millions of jobs depend on these ports, which bring in almost 40 percent of all sea-born trade.

So, money is being brought in here to remain competitive, to improve and expand $6 billion just on the port of Long Beach side, including $2 billion for this new semi-autonomous terminal, which is as a stand-alone port, would be one of the top five in the country. It’s also all electric.

On the Los Angeles side, terminals are investing in robots to speed turnaround times for truckers, as the port has recovered from a terrible slowdown over a year ago. But perhaps most importantly, the expanded Panama Canal can accommodate ships carrying around 13,000 standards containers or TEUs. This Long Beach terminal can handle 24,000 TEUs. A ship so big it hasn’t been designed yet.

SLANGERUP: More than 50 percent of the ships on order in this next few years, are all bigger than 14,000. So that means none of those ships being delivered into service will be able to go through the Panama Canal.

WELLS: Southern (NYSE:SO) California port authorities believe they have their labor issues in check and infrastructure is improving, hoping their biggest advantage in the face of a new competition is the lower cost of building docks rather than locks.

For NIGHTLY BUSINESS REPORT, Jane Wells, Long Beach.

(END VIDEOTAPE)

MATHISEN: Walgreens warns investors it faces uncertainty in the U.K. market and that’s where we begin tonight’s “Market Focus”.

The company which owns Boots locations in the U.K., said the plunging pound and volatile situation following Britain’s vote to leave the European Union could impact on impact on sales. Shares of the drugstore operator down more than 2 percent to $81.55.

DuPont was found liable for an Ohio man’s testicular cancer from a chemical used to make Teflon. It was found in the drinking water. A jury found the chemical giant negligent and order the company to pay $5 million in damages. DuPont’s recent spin off, Chemours, will pick up the liability. The cases one of thousands the company faces regarding toxins found in water supplies. Shares of DuPont and its spin off Chemours both down today with DuPont at $61.85 and Chemours at $5.93.

The pharmaceutical company Medivation (NASDAQ:MDVN) has signed confidentiality agreements with several potential suitors, including Sanofi, which has reportedly sweeten its initial $9 billion bid for the company. Shares of Medivation (NASDAQ:MDVN) up nearly 1 percent at $62.33, while the U.S. listed shares of Sanofi fractionally to $41.23.

And sales of McDonald’s (NYSE:MCD) all day breakfast menu have been huge for the economy and the fast food giant announced today it will add additional items to its all day breakfast menu. It’s going to add the popular McMuffin and McGriddle sandwiches to the menu, sometime later this year. Shares of McDonald’s down slightly on the day, by about 13 cents. We’ll even buy you a McGriddle, Sue, $120.63.

HERERA: Britain’s Melrose Industries is buying cooling and heating manufacturer Nortek for nearly $3 billion including some debt. Melrose cited Nortek’s large presence in North America as a driver for the deal and it comes as the Brexit vote casts uncertainty over the U.K. economy. Shares of Nortek surging more than 38 percent to $86.58.

Tesla provided more transparency into a death of a driver while the vehicle’s autopilot mood was allegedly engaged. The company said it alerted federal authorities nine days after it first learned of the May 7th incident. The crash became public on June 30th.

The timing of the disclosure has come under question with CEO Elon Musk defending the decision by tweeting the fatality was not material for Tesla shareholders. Shares of the electric automaker are up slightly to $241.44.

Starbucks (NASDAQ:SBUX) customers may have had to dig a little bit deeper into their pockets after the company inadvertently started a planned price hike a week early. The early issue has since been fixed, but the company still plans to raise prices as high as 30 cents per drink on July 12th. Shares of the coffee chain barely moved during today to $56.75.

Verizon (NYSE:VZ) is also hiking prices. The price change ranges from $5 to $10 depending on the plan, but users will see their data allowance raised as well. Verizon (NYSE:VZ) also said unused data can be carried over from month to month. Shares of the nation’s largest wireless carrier up half a percent to $56.26.

MATHISEN: Well, it is that time of year when some of the most powerful names in business, politics and the media head to Sun Valley, Idaho, to plot the course of their industries and maybe do a little deal making on the side. But this year, the issues being discussed are taking on greater than usual importance.

Julia Boorstin is there and has more.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Hey.

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Over 300 media moguls and tech titans with some of the most powerful investors in the world are here in Sun Valley to participate in panels addressing topics from the impact of Brexit to artificial intelligence, to terrorism. This morning, we saw Alphabet’s Larry Page, Liberty Media CEO Greg Maffei, along with Facebook (NASDAQ:FB) COO Sheryl Sandberg, and Activision’s CEO Bobby Kotick.

Arriving with his wife Diane von Furstenberg, Barry Diller predicted more consolidation among media companies and their revolution for content creators, thanks to new ability to distribute without the media giants here.

BARRY DILLAR, IAC CHAIRMAN & CEO: The Internet, where you can publish direct, without going through anybody, you can use our Vimeo, you can use all sort of devices to do it, will allow creators I think for the first time to not be dominated by distributors, an all together healthy condition.

BOORSTIN: In addition to Diller, a number of executives here in Sun Valley, including AOL’s Tim Armstrong and Discovery’s David Zaslav have told us they expect more deals to happen between internet and content companies or perhaps some outright acquisitions.

The other hot topic, Brexit. Armstrong, Zaslav and others saying they’re focused on growing their companies through what looks like a period of slower grow in Europe. Rare CEO here who isn’t concerned about Brexit’s implications for his business, CBS (NYSE:CBS) CEO Les Moonves.

LESS MOONVES, CBS (NYSE:CBS) CHAIRMAN & CEO: Fortunately, we have very, very little of our revenue that comes from the U.K. You know, we’re not as big internationally as some of our media competitors. So, it hasn’t affected us at all.

BOORSTIN: Moonves has been spending time here with Sun Valley newcomer Shari Redstone. She’s embroiled in a legal battle over her father’s other giant, Viacom (NYSE:VIA). We haven’t seen CEO Philippe Dauman yet, but he’s on attendee list, which is sure tension to these beautiful mountains.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Sun Valley, Idaho.

(END VIDEOTAPE)

MATHISEN: To read more about what’s happening in Sun Valley, head to our Website, NBR.com.

And coming up, it’s a controversial law causing one of America’s competitive states to lose its edge.

(MUSIC)

Those record low bond yields are driving down mortgage rates and pushing up mortgage refinancing. The mortgage bankers association reports a 21 percent rise applications to refinance last week. That refi volume is more than double what it was just a year ago.

HERERA: Soccer player Lionel Messi, who has just ranked as one of the world’s highest paid athletes by Forbes, has been sentenced by a Spanish court to 21 months in jail. He was found guilty of tax fraud for using offshore companies to avoid paying taxes on advertising contracts. He was also fined more than $2 million. His father also received a 21-month jail term. Messi is expected to appeal the sentence but under Spanish law, those lower sentences mean that he likely will not serve any time in jail.

MATHISEN: Activist groups are pressing their calls for boycotts after the North Carolina legislature adjourned last week without making any major changes with that controversial law that dictates where transgender people can go to restaurant. As we’ve been reporting, businesses have threatened to pull out of the state or open operations elsewhere.

But will the protests make any difference?

Scott Cohn is in Raleigh tonight.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The protests have been loud. The threats have been dire.

CHRIS SGRO, NORTH CAROLINA STATE REPRESENTATIVE: This is about long-term economic sustainability for the state of North Carolina and that is deeply at risk with the way our repetition has been damaged by this law.

COHN: Already, the Chamber of Commerce in Charlotte, North Carolina’s largest city, says the law has cost the area $285 million and 1,300 jobs. The NBA, which has a basketball franchise in Charlotte, is reconsidering, whether to hold next year’s all-star game there. The governor and legislature are so far unmoved, refusing to make any changes in the law, but if they are gambling with the state’s economy, there are some reasons they just might win.

North Carolina is traditionally one of America’s most competitive states, its economy now on the upswing. Consumer spending here more than $300 billion a year. Proponents of the law say that’s what businesses should focus on.

TAMI FITZGERALD, NC VALUES COALITION: Businesses who care about being bullied by big groups like the Human Rights Campaign more than they care about the citizens they serve or the profit their company makes are just doing so to their own detriment.

COHN: This isn’t the first time businesses have taken sides in the culture wars. Last year, they were threatening to boycott Indiana over its so-called religious freedom law that critics said was a license to discriminate. The state did make some changes, but the law remains in effect.

Today, the boycotts have faded and business in Indiana is up. The North Carolina law is more divisive and opponents say their fight isn’t over. The question is whether business will put its money where its mouth is.

Scott Cohn, NIGHTLY BUSINESS REPORT, Raleigh, North Carolina.

(END VIDEOTAPE)

MATHISEN: To read more about the bill that’s causing the state of North Carolina millions, head to our website, NBR.com.

And finally tonight, half a billion dollars, that’s the jackpot that’s up for grabs in the next mega millions lottery drawing. With no winner lasting night, the pot now rolls over for the drawing on Friday. The jackpot is the third largest ever in mega millions history and the seventh largest in U.S. history.

And before we go, let’s take another look at the day on Wall Street. The Dow was up 78 points, to 17,918. NASDAQ gained 36, and S&P 500 added 11.

HERERA: So, if we win and you don’t see us here —

MATHISEN: You’ll know.

HERERA: We’ll know.

That does it for us on NIGHTLY BUSINESS REPORT. I’m Sue Herera. Thanks for watching.

MATHISEN: And thanks from me as well. I’m Tyler Mathisen. Have a great evening, everybody. And we’ll see you right back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2016 CNBC, Inc.

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