Nightly Business Report – April 9, 2019

ANNOUNCER:  This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.  

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Win streak snapped.  The S&P ends its string of gains thanks to fresh trade tensions and the possibility that they may never fully go away.  

Border bottleneck.  The auto industry faces a new challenge and it`s coming from the dividing line between the U.S. and Mexico.
And rising rents.  Why it`s not just home prices that are sky high in some markets.  

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, April 9th. 

Good evening, everyone, and welcome.  Bill is off this evening.  
There was a sense of nervousness on Wall Street today not only because earnings season is about to start, but also because of trade.  That caused the S&P 500 to halt an eight-day rally and push the treasury yields lower.  The Dow Jones Industrial Average fell 190 points to 26,150.  The Nasdaq dropped 44 and the S&P 500 gave back 17. 

And today`s trade issue wasn`t about China.  Instead, it was about the European Union.  

Kayla Tausche has the details.  

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT:  It`s the latest salvo in the U.S.-Europe trade dispute, which had gone mostly quiet since the truce last August.  But it`s ramping up again.  The U.S. trade representative outlining $11 billion in European goods subject to new tariffs including aircraft, wine and 40 different types of cheese.  
It`s retaliation for Europe`s subsidies on Boeing (NYSE:BA) competitor Airbus.  President Trump tweeting that the E.U. has taken advantage of the U.S. on trade for many years, it will soon stop.  It`s not clear how high the tariffs would be or when they would go into effect.  But three White House aides tell me the goal on trade policy is to pivot the negotiations with Europe which have stalled once China trade talks have concluded. 

The Trump administration has a May 18th deadline to chart its next steps on auto tariffs which will largely impact Europe.  Hence, why President Trump suggested a four-week time frame for China talks, said they would end before that date.  China said it`s not committed to that timeline and Brussels called the new terror threat exaggerated.  But President Trump has shown he`s not one to back down.  

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.  

HERERA:  Much of the focus investors have been on trade relations with China and a hope for a deal between the world`s two largest economies.  
But as Steve Liesman reports, that might not signal the end of the trade story.  

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  A lot of market commentary sees tariffs in the trade war as temporary events.  A U.S.-China trade deal, the thinking goes, will sound the all-clear signal for markets and the economy, but their indications may be in for a longer, more protracted trade battle, a forever trade war that could last the balance of the Trump administration.  

The chief economist of the IMF which downgraded global and U.S. growth today cited specific concerns for ongoing trade battles.  

GITA GOPINATH, IMF CHIEF ECONOMIST:  There has been improvement on the front between the U.S. and China, and a possible agreement in the near future.  You know, we are worried about trade tensions escalating in other sectors like the auto sector, and that is particularly damaging given that it`s a highly integrated sector for the large global supply chains.  

LIESMAN:  Consider these developments.  The tariffs remain in place for Mexico and Canada even after the U.S. struck a trade deal with the two countries.  The U.S. wants to retain the right to put tariffs on China even after they signed a trade deal.  

Finally, in just the past couple of days, the U.S. threatened the European Union with tariffs on aircrafts and autos could be next.  
Art Hogan, chief market strategist with National Security, says if the administration decides to pivot immediately to tariffs on European autos, any positive momentum derived from an end to U.S.-China trade war will dissipate rapidly.  It could be that tariffs are a negotiating tool and another explanation could be that the administration could keep tariffs in place for years in order to protect U.S. industries have permanently reduced imports.  If the goal is bringing back manufacturing loss to China and other chief competitors, then temporary tariffs won`t do. 

If that`s the goal, markets should prepare for permanent trade barriers and possibly a forever trade war.  

HERERA:  The number of job openings fell to an 11-month low in February.  According to the Labor Department, the measure dropped by 538,000 to 7.1 million.  That`s the lowest level since March of last year.  But the decline is off of near record levels and if you recall the government employment report that month showed a sharp dip, but only to bounce back in March.  

Oil prices fell today, but that has not been the trend.  Domestic crude is up about 40 percent this year.  There have been recent rumblings about violence in Libya that have been impacted by sanctions on Iran and Venezuela.  

So we brought in John Kilduff.  He joins us now to talk more about what`s happening in the oil market and what it means to you.  He is founding partner at Again Capital.  
Welcome back, John.

JOHN KILDUFF, AGAIN CAPITAL:  Good evening, Sue.  Thank you.

HERERA:  Let`s start with Libya and the possible impact that it is having on oil prices right now.  

KILDUFF:  Right, it`s sort of the icing on a bad cake for consumers at this point.  

HERERA:  Right.

KILDUFF:  Basically, we`ve had warring factions in Libya for a year since Moammar Gadhafi, the former dictator, was overthrown and ultimately killed.  There is a consolidation now of power going on.  There is a general by the name of Haftar that has marshaled his resources.  He already controls the eastern part of Libya and the oil is falling there.  He is now making a move to consolidate the rest of the country and the battle for Tripoli, the capital is on so to speak.  

I`m getting the sense that he`ll prevail and that the situation will revert to the way it was when Moammar Gadhafi was there, a sort of heavy handed force on an otherwise tribally organized country.  

HERERA:  Right.  

KILDUFF:  Which is good news for consumers because the oil will flow.  

HERERA:  The oil will flow.  It is not flowing for other parts of the country, of the world, rather and the whole situation is really exacerbated by the fact that we`ve had some refining issues here at home, correct?  I mean, we`ve had bad weather in certain places and catastrophes in others.  

KILDUFF:  Right, and sort of the one-two punch is this.  You have Venezuela imploding because of what`s happening in that country and its involvement into just zero oil production at some point here.  Also, too, you have a very committed Saudi Arabia that`s working hard to reduce global supplies and they`ve undercut their quota by quite a bit.  So, that has tightened the market.

So, now, you add Venezuela getting worse and worse and you add the Iran sanctions and now you add problems with the U.S. refiners and it sort of gets the cauldron boiled up from time to time.  

HERERA:  Yes, we`ve had major fires at U.S. refineries and we`ve had the Mideast flooding.  All of this for consumers means higher prices, right?  
KILDUFF:  Right.  In the Midwest, flooding is a weird one off, too, because what happened there is the ethanol supply which is blended off the coast particularly in California and in New York and East Coast is stranded there.  And the East Coast are scrambling to buy it from Brazil, the West Coast they`ve not had a lot of options, there`s actually been spot shortages.  

So, yes, again, this is something that should pass.  I would point out that the fact that the U.S. is now the world`s number one oil producer at over 12 million barrels, it does cover a multitude of sins.  We would be talking about a very horrific price environment, Sue, if it`s just a couple of years ago —  

HERERA:  Absolutely.

KILDUFF:  — when we were nowhere near those levels.

HERERA:  All right.  On that optimistic note, John Kilduff — 

KILDUFF:  Hang in there, folks.  It will be OK.  

HERERA:  Exactly.  Thanks, John.  

HERERA:  Well, there`s a new threat for the auto industry involving parts and vehicles built in Mexico.  Slowdowns and delays are developing at the border due to the shift on how border patrol agents are being used.  
And as Phil LeBeau reports, that is creating bottlenecks.  


PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The U.S.-Mexico border.  Every day, thousands of auto parts and automobiles go back and forth before they eventually wind up in showrooms here in the U.S. 
But in the last week, the president`s push to tighten border security has created serious delays which could wind up slowing down auto plants.  

KRISTIN DZICKZEK, CENTER FOR AUTOMOTIVE RESEARCH:  Automakers know what they get from Mexico and they know what they`re not going to get when there is some shipments that are getting through and some aren`t and there are seven-hour delays, and, you know, you`re going to send home half a shift, you`re not going to have, you know, not very smooth production until the whole production system can adjust this.  

LEBEAU:  Last year, more than half of the trucks and cars sold in the U.S. were built in the U.S., with another 15 percent from Mexico, easily outpacing imports from other countries.  It`s where many Chevy Silverado, Ram pickups and other popular models are built.  So far, the supply of new vehicles coming out of Mexico has not been hurt, but if the delays continue and the flow of components or parts slows down, so will assembly lines both in Mexico and the U.S. 

DZICKZEK:  It only takes one missing part to suspend production here in the U.S. and on the other side in Mexico, and the cross-border trade between the U.S. and Mexico is really quite intense.  

LEBEAU:  It is not uncommon for auto parts to go between the U.S. and Mexico two to three times before they ultimately wind up in a finished vehicle, which is why the auto industry is closely following the tension at the border.  


HERERA:  On Capitol Hill, executives from some of the nation`s largest pharmacy benefit managers testified on the rising price of prescription drugs, and they were on the defensive saying they are not to blame.  
Bertha Coombs has the details.  

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The Senate Finance Committee heads Chuck Grassley and Ron Wyden say they want to get to the bottom of whether pharmacy benefit contracts put industry profits ahead of consumer prices.  

SEN. CHUCK GRASSLEY (R-IA):  More transparency is needed.  The current system is so opaque that it`s easy to see why there are questions about PBMs motives.

COOMBS:  PBMs are the middle men who negotiate discounts with drugmakers on prescription drugs for insurance companies and big employers.  Now, drugmakers and others say that those discounts negotiated through secret contracts lead to higher list prices and consumer costs.  

SEN. RON WYDEN (D), OREGON:  I`m of the view that pharmaceutical benefit managers guard their operations with greater secrecy than HBO is guarding the ending of “Game of Thrones.” 

COOMBS:  PBM executives say they support transparency to a point.  
JOHN PRINCE, OPTUMRX CEO:  We have transparency to who hires us.  We also are transparent to the government in terms of disposing it to CMS in terms of rebates.  But if you disclose that to the external market, it would hurt our ability to get a good value for people we negotiate for.  

COOMBS:  Cigna`s Steve Miller defended PBM contracting, noting tough negotiations help produce big savings when expensive hepatitis C drug hit the market.  

STEVEN MILLER, MD, CIGNA (NYSE:CI) CHIEF CLINICAL OFFICER:  In the first year, we treated 60,000 patients to cure to achieve higher adherence than the drug`s clinical trial and save patients and health systems over $1 billion.  

COOMBS:  Asked about proposals to cut out the middlemen and the government pricing new drugs, the executives warned it wouldn`t keep drugmakers from raising prices.  

WILLIAM FLEMING, HUMANA HEALTHCARE SERVICES PRESIDENT:  My concern from government to get the negotiation would be higher list prices initially when they come out to offset what the manufacturer would have to give up.  

COOMBS:  The pharmacy benefit firms will be back on Capitol Hill tomorrow, this time along with drugmakers for a hearing in the House, Energy and Commerce Committee that`s focusing on insulin prices.  

HERERA:  There was a separate hearing in the news that Wall Street was watching.  

Attorney General Barr testified before the House Appropriations Committee.  He gave lawmakers a timeframe for when the Justice Department will release a redacted copy of the Mueller report.  


HON. WILLIAM BARR, ATTORNEY GENERAL:  Within a week, I will be in a position to release the report to the public and then I will engage with the chairman of both judiciary committees about that report and about any further requests that they have.  


HERERA:  The hearing was intended to focus on the 2020 fiscal budget.  
It is time to take a look at some of today`s upgrades and downgrades.  Disney (NYSE:DIS) was upgraded to outperform from market perform at Cowen.  The analyst cites Disney`s product pipeline and says Thursday`s investor day will likely be a debt clearing event for sentiment.  The price target is $131.  The stock rose more than 1.5 percent to $116.86.
U.S. Steel was downgraded to underperform from neutral at Credit Suisse.  The analyst says U.S. Steel is in a weaker competitive position compared to its peers.  The price target is $13.  The stock fell about 10 percent to $17.77.  

Still ahead, think the retail industry is changing?  Well, a new report says just you wait.  


HERERA:  Bank of America (NYSE:BAC) is hiking its minimum wage to $20 an hour.  The CEO says the increase will be implemented over the next two years.  Paychecks will go to $17 at first and then $20 which is the highest minimum wage paid by any of the country`s biggest banks.  The announcement comes one day before bank`s CEOs are scheduled to testify on Capitol Hill.  

Optimism on Main Street ticked higher last month.  According to the National Federation of independent business, business owners are more optimistic about economic growth and do not expect a recession any time soon.  The survey also points to solid investment spending and hiring.  
Well, the retail industry could use some of that optimism as store closings are projected to accelerate.  According to UBS, nearly 75,000 retail stores will close if online sales reached 25 percent in total retail sales by 2026.  

Michael Lasser joins us.  He`s with UBS to discuss his outlook.  He wrote that report.  Michael, welcome.  Nice to have you here.  

MICHAEL LASSER, UBS RETAIL ANALYST:  Thanks for having me, Sue.
HERERA:  Very quickly, how did you come up with that metric and those numbers?  

LASSER:  The way we came up with those metric — measures is looking at a variety of data from various sources and came up within the sources to determine what`s the equilibrium between the supply of available places to buy goods and the demand to buy goods through physical places.  And what we`re seeing is there are just too many stores in the U.S. and as a result we`re going to see more store closures over time, particularly as e-commerce growth continues to increase.  

HERERA:  You broke it out into different subsectors.  Which subsectors need to close the most stores?  

LASSER:  The way we see it, the subsector that need to close the most stores include those consumer electronics, home furnishings, the apparel sector.  These are areas where we`re seeing continued increases in the rate of online penetration and as a result we suffer from too much capacity in terms of the number of stores that are serving those industries.  As a result they`re the ones that will be at the forefront of store closures over the next several years.  

HERERA:  And how many of these are within enclosed malls versus how many are freestanding?

LASSER:  It`s a good question, Sue.  Right now, there are about 100 in enclosed malls in the U.S.  A good portion of those enclosed malls include apparel retailers.  And so, that`s going to be the heart of the consolidation in that sector, and we`re going continue to see more and more closures in that area and otherwise we`ll see home furnishings and retailers and clothes within malls and we`re seeing that right now.  We`re going to see a shift from the mall-based retailers to off-mall as a result of the convenience of off-mall shopping.  

HERERA:  Now, there are some sectors in retail that you do like.  So from an investment perspective for those who have a longer term time horizon, you like hard lines, things like Home Depots and Lowe`s and the like, correct? 

LASSER:  That`s correct, Sue.  We like those sectors because there is an element to the sale where the consumer still really values going to the store.  In the case of Home Depot (NYSE:HD) and Lowe`s, even when doing online sales, about half of those are picked up in the store.  
The same is true in the auto part space for companies like AutoZone (NYSE:AZO) and O`Reilly and Advance Auto.  So having that Omni-channel presence is very important and you`re seeing less disruption from the online channel.  

HERERA:  Michael Lasser with UBS — Michael, thank you. 

LASSER:  Thank you, Sue.  

HERERA:  From the retail sector to the investment that`s historically been popular in retail investors, muni bonds.  And believe it or not, this plain vanilla part of the market is garnering a lot more attention following the passage of the new tax law.  
Robert Frank explains.  

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  One of the least glamorous segments of the investing world is suddenly a huge hit with wealthy investors.  Municipal bonds or muni bonds have soared in popularity in recent months as investors look to offset a big tax bill.  Investor flows into muni bonds so far this year have topped $20 billion, that`s it is highest in 13 years.  

The main reason: tax-free income.  Investors who live in high-tech states like New York, New Jersey or California are writing bigger checks to the government this month because of that new cap on state and local tax deductions.  To create more tax-free income, those high earners are putting more money into muni bonds which are exempt from federal income and often state and local income taxes.  So, if you have a 10-year muni bond that yields 2 percent, its taxable equipment could be 4 percent or higher.  

All that demand has driven down yields in the $3.8 trillion market to the lowest levels against Treasury since 2001, and that has been good for the state especially high-tax states that have been fighting the new tax law.  Eight of the ten biggest issuers in the first quarter were in California, New York and Connecticut.  New Jersey and Illinois were also big issuers.  So the tax law has lowered the borrowing cost for the state most opposed to the new tax code.  

California last month issued a $3.3 billion bond deal that had an interest rate of about a third of a percentage point below 2017.  While that doesn`t sound like much, it saves the state about $8 million.  Politicians in those high-tech states saying the gains from the muni bond boom can`t nearly offset the billions that their taxpayers are leaving to Washington.  
REP. JOSH GOTTHEIMER (D), NEW JERSEY:  I think obviously good resource investment into states is a good thing and to help infrastructure.  But this is certainly not a long-term solution.  

FRANK:  The big question for investors is whether the muni mania has gone too far and created a new asset bubble.  For example, yields on munis for Illinois, the lowest rated state in the country, are now below 3.6 percent.  That`s only about a point higher than the U.S. 10-year treasury.  

HERERA:  Boeing`s report has declined in deliveries and that`s where we begin tonight`s “Market Focus”.  

Total deliveries were nearly halved in the first quarter following the grounding of Boeing`s popular 737 MAX jet.  Net orders fell to 95 from 180 a year earlier.  There were no new 737 MAX orders during the month of March.  Boeing (NYSE:BA) shares fell about 1.5 percent to $369.04.  
And the grounding of Boeing (NYSE:BA) 737 MAX jet is one of the reasons why American Airlines trimmed its first quarter revenue forecast.  The grounding forced the airline to cancel hundreds of flights.  American says the key revenue metric will now be flat to up 1 percent.  Its prior forecast called for 2 percent growth.  Shares fell more than 1.5 percent to $33.31.  

Levi Strauss reported a 7 percent rise in quarterly revenue and earnings of 37 cents per share.  The CEO described growth at the company as broad based.  Since this was the jeansmaker`s first report since going public, there were no estimates available.  The stock rose in initial after-hours trading after closing the regular session at $21.88.  

There have been a lot of rumblings about regulating big tech companies.  Today, a Senate bill was introduced that takes aim at social media firms and it comes a year after a high-profile executive was called to Capitol Hill.  
Kayla Tausche is back with us.  


TAUSCHE:  It`s been a year since Mark Zuckerberg embarked on his apology tour after the Cambridge Analytica scandal.  

MARK ZUCKERBERG, FACEBOOK CEO:  We didn`t take a broad enough view of our responsibility and that was a big mistake, and it was my mistake and I`m sorry.  

TAUSCHE:  A cascade of hearings since then.  Executives from Google (NASDAQ:GOOG), Twitter and Facebook (NASDAQ:FB) testifying on everything from privacy to political bias, though progress on reining in social companies has been slow.  But today, Virginia Senator Mark Warner took another run at regulation running up a first in the series of bills to challenge business as usual.  

SEN. MARK WARNER (D), VIRGINIA:  Mark Zuckerberg put in an editorial in a paper a week ago saying, calling for more regulation.  I think the platform companies will now have an opportunity to put their money where their mouth is to see whether they support this legislation and other approaches.  

TAUSCHE:  The bell would ban a practice called “dark patterns” where users are forced to share their data or opt into terms set by the company in order to use a product.  It would create a new regulator under the new Federal Trade Commission to be a cop on the beat.  

A bipartisan group is working on a broader package of privacy safeguards.  Warner hopes his bill co-sponsored by Nebraska Republican Deb Fisher would get adopted by the group, whether it could pass large regulation into law by 2020 is uncertain.  But California`s effort is certain, new consumer processions set to become law next year.  

JASON HELFSTEIN, OPPENHEIMER & CO.:  If Congress doesn`t pass a national kind of privacy law, will go into effect January of next year and it`s quite onerous.  And I think you`re seeing can the companies like Facebook (NASDAQ:FB) trying to get in front of it.

TAUSCHE:  That effort includes frequent face time in Washington with regulators, lawmakers and the president, and the record amount of spending on lobbying.  Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) spent $35 million in 2018, a roughly 15 percent increase from the prior year.  Twitter`s lobbying spent double.  

That money is to influence bills that have not been written, but the biggest cost could come from investigations at the Federal Trade Commission, the Department of Justice and housing and urban development that could lobby massive fines on tech companies.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.  

HERERA:  Coming up, we often talk about rising home prices, but in some markets rental costs are a real issue.  

HERERA:  Home sales may be heating up this week, but renters aren`t getting a break.  In fact, rents have turned higher yet again and in some markets, affordability has become a significant challenge.  
Diana Olick breaks down the numbers.  

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  If you`re looking to rent an apartment, it may take you a while to find one.  The vacancy rate at the end of last year fell to the lowest level since 1999.  This, even as more renters become buyers.  

GREG WILLETT, REALPAGE CHIEF ECONOMIST:  Resident retention when leases come up for renewal is at record level.  So while you might be losing more people to home purchase, they`re moving less frequently for job change or for change in household configuration.  

OLICK:  Low vacancy means landlords can charge higher rents.  Rents backed off a little bit in 2017 and for much of last year as new apartments supply hit the market.  But rents are turning higher again now, and in some markets, the gains are causing real burdens for renters.  The worst, Miami, San Diego, L.A, New York and Orlando, according to a new survey from Freddie Mac.  

In this markets, renters are paying well more than 30 percent of their incomes on rent, in some cases, even half their incomes.  
San Francisco has the second highest rent in the country but is ranked 13th on the list of most rent burden.  That`s because salaries there are high.  

UNIDENTIFIED MALE:  Definitely keep me from saving what I want to actually spend on.  So, I mean, pretty much having a roof over my head over going to try to save up for a nice car or a nice vacation is just kind of heartbreaking. 

OLICK:  Even renters in luxury buildings won`t catch a break.  They have been seeing some good deals that so much new product was being completed in the last few years and landlords were offering incentive, but not so much now.  

WILLETT:  You get that initial resident space built and when renewal leases come up, you can push the pricing a little bit.  

OLICK:  Overall, rents are now rising at about the same pace as wage growth.  So, while too many Americans are still burdened by high rents, the bright side might be that unlike five years ago when rents were soaring, the situation this year may not get much better, but it won`t get worse.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.  

HERERA:  And that is NIGHTLY BUSINESS REPORT for tonight.  I`m Sue Herera.  Thanks for joining us, and we`ll see you tomorrow.

Nightly Business Report transcripts and video are available on-line post broadcast at The program is transcribed by ASC Services II Media, 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) 2019 CNBC, Inc.

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