Transcript: Nightly Business Report – June 5, 2019

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Rally extended.  Stocks climb  for a second straight day even as questions about the economic expansion  remains.  

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR:  Meeting with Mexico.  Top  diplomats are in Washington to discuss new tariffs days before new duties  on all Mexican imports are scheduled to go into effect.  

HERERA:  Lifestyles of the rich and powerful.  Amazon`s Jeff Bezos is  reportedly buying three Fifth Avenue condos and we were able to take our  cameras inside.  
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for this  Wednesday, June 5th.  

GRIFFETH:  And we do bid you a good evening, everybody, and welcome.  
Well, it was another rally day on Wall Street today.  The Dow and the S&P  have now recorded their best two-day gains since January.  Enthusiasm from  yesterday carried over to today as investors appeared even more confident  that the Federal Reserve will cut interest rates some time this year.  Tech  rates rose, so did the interest rate sensitive utility and real estate  sectors. 

And with U.S. and Mexican officials talking today, some of the concerns  over trade that have rattled investors last week were put in the backburner  and we`ll have more on that in just a few minutes.  
In the meantime, the Dow gained another 207 points as you see to 25,539,  the Nasdaq was up 48 and the S&P added 22.  

HERERA:  And stocks rose despite mixed reports on the economy.  Job  creation in the private sector hit a nine-year low.  According to the  payroll processor ADP, businesses added just 27,000 jobs in May.  The  forecasts were for 175,000.  

A separate report, however, points to a strengthening services sector which  makes up the bulk of economic activity.  The Institute for Supply  Management reports an uptick in activity helped by gains in new orders and  that pickup in activity was echoed by the Federal Reserve`s Beige Book  which is an anecdotal look at the economy across the country.  
Ylan Mui reports tonight from the Central Bank.

YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The Federal Reserve said  that economic activity was modest this spring and that`s a little bit  better than the preceding period.  Almost all 12 Fed districts reported at  least some economic growth and some even enjoyed moderate gains.  Only one  district, St. Louis, said that economic activity was unchanged.  

Nationally, employment was about the same as last time.  Most districts  reported modest to moderate job growth, but the tight labor market remains  a constraint.  The Fed did find there was increasing wage pressure and  improved benefits across a range of occupations.

Meanwhile, the Fed said prices rose at a modest pace and as for tariffs and  trade uncertainty, there were a lot of interesting anecdotes out of Boston  and Dallas in particular.  In Boston, the report called out Huawei and the  impact on semiconductor firms.  It also said that trade uncertainty is  causing delays of new models in the auto industry.  

Meanwhile, over in Dallas manufacturers, retailers and the service sector,  they all pointed to tariffs as concerns for price increases and for demand.   And some companies said that long delays at the Mexican border were adding  to their transportation costs.  Overall, consumer spending was generally  positive and real estate and loan demand, they both pointed toward growth.  

The Fed said that the outlook for the coming months was modest and  positive, however, I will point out that that forecast is made before the  recent flare-up with Mexico.  
For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.  

GRIFFETH:  And while some economists say the risk of recession is growing.   Not every state can afford one.  
Robert Frank explains.  

ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  A report from Moody`s  (NYSE:MCO) found that while most states are prepared for a recession, two  of them would face a budget crisis and be forced to cut costs or raise  taxes.  Those two states, you guessed it, are Illinois and New Jersey.   Report looked at how much revenue would likely drop in each state in the  downturn and whether they had enough reserves to fill the gap.  
Now, Moody`s (NYSE:MCO) warned that even a mild downturn could be damaging  to some states in the 2008 crisis, since states have become a lot more  reliant on the personal income tax and the income tax is more reliant on  the top 1 percent, and the incomes to that 1 percent are the most volatile.   But the biggest factor is pension liabilities, which for Illinois, would be  six times its total tax revenues in the next recession.  New Jersey`s would  be more than three times revenues, which means that for affluent residents  of those states and probably Connecticut, too, taxes will go up.  
Now, politicians and tax experts say these states missed an opportunity to  save during the good times.  

EVAN BAYH (D), FORMER INDIANA SENATOR:  Put some away in the rainy day fund  and fully fund your pension so when tough times come along, you`re prepared  for that.  Politically, the temptation is on to just let the party roll  when times are good.  

FRANK:  Instead, the new governor of Illinois is already pushing to  eliminate the state`s flat tax with a progressive income tax where the  wealthy pay a higher rate, and New Jersey`s Governor Phil Murphy insisting  on a millionaire`s tax which the legislature is fighting.  

HERERA:  So, from recession fears to mixed economic data, to the call for  interest rate cuts and just where does the economy stand right now?  
Joining us to talk about that is Craig Dismuke.  He is the chief economist  at Vining Sparks.  
Welcome back, Craig.  Nice to see you again.  


HERERA:  You know, there are a lot of different opinions floating out there  about where we are economically, but you fall in the camp of fundamentally  stable, why?  

DISMUKE:  Well, I think you look at the consumer, the consumer`s been in a  good position.  And we see the unemployment rate at 3.6 percent and we`ve  seen the wage growth above 3 percent now.  The consumer debt load isn`t too  onerous in this cycle.  

And I think that`s the basis for this stable economy and business  investment is positive, and we see some weakness and we`re starting to see  some growing concerns, obviously, with the trade uncertainty that`s  creeping in.  But I think, today, I was most encouraged by the ISM number  and the fact that it didn`t plunge — did actually bounce a little bit.   That was an encouraging number to us.  

GRIFFETH:  But having said all that, though, you still — you believe the  Fed will cut rates this year.  Why?  

DISMUKE:  Well, for a couple of reasons.  You know, the trade talks with  China have deteriorated and they`ve more so than we expected coming into  the year.  And so, I think that will start to feed into the real data.  I  think you`ll start to see some weaker growth.  

On top of that, you`ve got these tariffs that have been added to Mexico.   That creates a whole new level of uncertainty for business owners in the  U.S.  You have inflation that`s running below the Fed`s target, down at 1.6  percent right now.  The Fed`s talking about a new approach to the targeting  and you`ll have to prove that you`re committed to that.  So, I think that`s  going to put them in a position to be more dovish.

And then the last thing is the market has priced this in, and the markets  are expecting a rate cut and that`s what we see in the bond market and if  you don`t, if the Fed were not to cut rates in the second half of the year,  it risks creating another scenario like we saw last December where the  markets were disappointed in monetary policy.  

HERERA:  Yes, it`s kind of a vicious circle, is it not?  

DISMUKE:  It is.  

HERERA:  I mean, if they cut, it`s because the economy is weak and if they  don`t cut, then the market gets upset and the economy may weaken and  confidence may suffer.  

DISMUKE:  Absolutely.  And I think to some degree that`s where we are now  and the markets are expecting — the nice thing for the Fed right now is  like we look at previous cycles going back to 1998.  We don`t have a lot of  inflation right now.  And in fact, it`s below their target and it gives  them the ability to be patient and to cut rates 25 or 50 basis points and  underneath the purview of their mandate and try to boost growth a little  bit and stimulate things in the middle of all of this uncertainty.  

HERERA:  Craig, thank you so much.  Craig Dismuke with Vining Sparks.  

DISMUKE:  Thank you.  

GRIFFETH:  Meantime, oil prices are now in bear market territory, meaning  that they have fallen more than 20 percent since their most recent peak in  late April.  A government report today showed an unexpected surge in  stockpiles of crude.  Prices were already under pressure because of fears  of slowing global growth, and this is the third bear market for U.S. oil  since the start of 2017, and today`s close is its lowest price since  January.  Domestic crude settled down more than 3 percent to around $51 a  barrel.  

HERERA:  The International Monetary Fund warns that a trade war could wipe  $455 billion off of global growth next year.  The IMF report said that the  most recent U.S.-China tariffs could further reduce investment and  productivity.  

CHRISTINE LAGARDE, IMF MANAGING DIRECTOR:  Some of the risks that we had  identified back a couple of months ago have actually become materializing.   One of the ricks that we have identified is the risks associated with trade  tensions and two months ago, we said be very careful what you are doing  with this major growth engine that is trade because anything that breaks on  trade such as tariffs, such as non-tariff barriers is going to actually be  a break on growth.  

HERERA:  For some perspective, the estimated decline in GDP would be larger  than South Africa`s economy.  

GRIFFETH:  And a number of companies today cited the impact of tariffs in  their earnings reports.  For example, bourbon maker Brown Forman  (NYSE:BF.A) says that the trade standoff will drag sales growth down by a  percentage point for the entire year.  American Eagle Outfitters (NYSE:AEO)  warn that if tariffs are expanded to apparel, its financial results would  take a hit.  

And Campbell`s Soup put it this way, it said that if retaliatory tariffs  with Canada would be avoided, a significant cost would be eliminated. 

HERERA:  A delegation from Mexico were in Washington today, hoping to avert  new tariffs that are scheduled to go into effect next week.
Kayla Tausche is at the White House for us tonight.
Good evening, Kayla.  

What does the administration want in these negotiations?

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Well, the White  House, Sue, has left the negotiations open and the demands open.  They said  that they want Mexico to substantially stop the flow of migrants and drugs  into the United States, but they haven`t exactly said what the number is  that they want.  They want Mexico to reinforce its border with Guatemala  and they also want Mexico to consider a proposal to become a safe third  country.  

That means that Mexico would have to accept all asylum seekers coming  through from Central America instead of the United States, but Mexico so  far has called that last one a red line.  

GRIFFETH:  What are the Mexicans offering?  I mean, they came with a list  of their own of demands and offers.  Did you get a sense of what they are?  

TAUSCHE:  Well, we mentioned that they are not willing to accept the U.S.  proposal to accept Central American refugees.  That being said, they are,  according to “Reuters” proposing a marshal plan for the rebuilding of  Central America.  They also are planning to propose a diversion of some  funds from the State Department program from 2008 that was to combat drug  and human trafficking, and we`ll see exactly what the White House says  about where those proposals stand right now.  

HERERA:  So do you have a sense of how likely it is that we will get a  deal?  

TAUSCHE:  Well, I think, Sue, for today, the prospect of a deal is low.  We  know the president likes to make his own deals and not only is he traveling  overseas this week, but many key members of his immigration policy team,  Jared Kushner, Stephen Miller, John Bolton, the national security adviser,  all of those officials are abroad with the president and he has a high- level delegation on his behalf, but it`s expected that the president will  want to do this deal himself.  

HERERA:  We will be watching.  

Thank you, Kayla.  Kayla Tausche at the White House.  

GRIFFETH:  Time to take a look at some of today`s “Upgrades and  Downgrades”.
Cannabis company Cronos Group was upgraded to buy from underperform at Bank  of America (NYSE:BAC) Merrill Lynch today.  The analyst says that Cronos is  likely nearing a launch here in the U.S.  Price target now $20.  Shares  rose 10 percent to $15.99.  

Pivotal Software was downgraded to neutral from outperform at Wedbush.  The  analyst calls the company`s quarterly results a train wreck and described  its deferred revenue and billings numbers as disastrous.  And the price  target is $15, and the stock itself was a disaster, down 41 percent today  to $10.89.  

And Roku was upgraded to buy from neutral at Guggenheim.  The analyst says  the advertising on its streaming platform is becoming more profitable now.   So, the price target is $119.  The stock rose more than 8.5 percent today  to $101.71.  

HERERA:  Still ahead, as big tech power grows, so does its spending in  Washington.  

HERERA:  As people spend more time online companies like Facebook  (NASDAQ:FB) and Google (NASDAQ:GOOG) are becoming more powerful.
And as Julia Boorstin tells us, new reports show just how dominant they`ve  become.  

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  With new antitrust  scrutiny looming for Facebook (NASDAQ:FB) and the other tech giants, two  new reports show the trends behind their growing power.  For the first time  ever, American adults will spend more time using their mobile devices  daily, three hours and 43 minutes than they do watching TV.  That`s  according to eMarketer, with mobile time expected to continue to replace TV  time in coming years.  

The U.S. internet ad market, the largest, surpassing $100 billion for the  first time this year, according to a new PWC study.  And Google  (NASDAQ:GOOG) and Facebook (NASDAQ:FB) dominated.  Google (NASDAQ:GOOG)  with 37 percent market share and Facebook (NASDAQ:FB) with 22 percent.  

TIM LESKO, GRANITE INVESTMENT ADVISORS:  What this is all about is data and  advertising, and if advertising keeps going up and the secular tailwinds of  people moving to online advertising and advertising on social media  continue to grow, they`re just going to see maybe a little bit of, maybe,  tamped down earnings over the last few years, but they`re still in the  sweet spot.  

BOORSTIN:  The question is whether the Federal Trade Commission which will  oversee antitrust in Facebook (NASDAQ:FB) will find that Facebook`s  dominant over social, it also owns Messenger, Instagram and WhatsApp,  erodes the competitive environment.  

BRIAN WHITE, MONESS, CRESPI, HARDT & CO.:  I do look at this group and I do  think there is a reason for increased regulation and I do think there is  the possibility for breakup and when I look at the companies most at risk,  it`s Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG), which if they were ever  broken up, their stock prices in my view will be much, much higher.  

BOORSTIN:  Now, Facebook (NASDAQ:FB) doesn`t dominate everything.  The  smart speaker industry is booming and expected to spawn a massive new ad  business with Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL), the leaders  there, Facebook`s Portal is just a small player which Mark Zuckerberg might  point to is a sign that Facebook (NASDAQ:FB) doesn`t deserve antitrust  scrutiny.  

Plus, Facebook (NASDAQ:FB) and Google`s dominance hasn`t hampered Amazon`s  ability to make gains, while Google (NASDAQ:GOOG) and Facebook`s market  shares are relatively steady, Amazon (NASDAQ:AMZN) has grown to nearly 9  percent in the U.S. digital ad market this year.  
For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.  

GRIFFETH:  And as big tech power grows, so does scrutiny from Washington  and that has led most of these companies to spend an awful lot of money on  lobbying.  
Aditi Roy has that part of the story for us.  

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Alphabet spent more than  $20 million on lobbying last year.  That`s more than any other U.S.  company.  In fact, for the past two years, the search giant has topped the  list of spenders outranking traditional front-runners like Boeing (NYSE:BA)  and AT&T (NYSE:T).  

It wasn`t always that way.  Back in 2009, Google (NASDAQ:GOOG) spent just  $4 million on lobbying, but that number started to climb in 2011 and `12,  just as it started facing more regulatory heat.  In 2012, Alphabet paid $22  million in fines to settle FTC charges to privacy.  In 2013, the company  agreed to change its business practices following concerns that those  practices were stifling competition.  

Over the last decade, spending on lobbying has gone up 500 percent.  It`s  not just Alphabet.  According to the Center for Responsive Politics, Amazon  (NASDAQ:AMZN) and Facebook (NASDAQ:FB) ranked among the top as well.  

Those three companies each spent on double digits on issues ranging from  competition to privacy.  That`s more than the amount Microsoft  (NASDAQ:MSFT) spent leading up to its trial with the DOJ two decades ago,  but it`s unclear what effect it will have on influencing government  regulation.  

KEN AULETTA, NEW YORKER MAGAZINE:  More effect than they had before, but  the problem is policies and practices are raising questions about whether  they should be regulated in some way.  

ROY:  Those questions resurfaced when European regulators took antitrust  action against Google (NASDAQ:GOOG) which resulted in fines of nearly $10  billion.  Industry experts say those actions might have stepped up pressure  on U.S. regulators who are now looking at their practices of Alphabet,  Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL).  

Google (NASDAQ:GOOG) is also putting resources into the E.U. regulatory  challenges, announcing today it has appealed the $1.7 billion E.U. fine for  March for stifling competition in the online advertising industry.  
For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, San Francisco.  

HERERA:  China slaps a fine on Ford and that`s where we begin tonight`s  “Market Focus”.  
In the latest ongoing trade tensions between the U.S. and China, Chinese  regulators have fined Ford`s main joint venture in China nearly $24 million  for setting minimum retail prices on its cars which the regulator said  restricts competition.  Ford`s shares fell more than 1 percent to $9.78.
Boeing (NYSE:BA) is reportedly in talks with China for one of its largest  orders of wide-body jets.  Bloomberg says the airline maker is discussing  orders for as many as 100 twin-aisle jets.  The 787 Dreamliners and the  777X planes which is Boeing`s newest long-range aircraft.  The report did  say no deal is imminent due to the trade war, but Boeing (NYSE:BA) rose  more than 1 percent to $348.75.  

And Lab Corp said that more than 7.5 million of its customers may have been  impacted by a data breach.  The blood testing provider said it was the same  breach that rival Quest Diagnostics (NYSE:DGX) said may have affected 12  million of its patients.  Nonetheless, Lab Corp was up a fraction to  $166.84.

GRIFFETH:  GIII Apparel reported better than expected earnings, but it did  miss revenue expectations.  The company has an array of brands that include  Calvin Klein, Tommy Hilfiger and DKNY, but it already had started raising  prices in an effort to offset Chinese tariffs.  That stock fell more than 9  percent today to $24.51.  

After the bell, online clothing services Stitch Fix topped expectations and  saw an increase in its active clients.  The news sent the stock initially  higher after-hours, but they did close the regular session down more than 2  percent to $23.57.  

Also after the bell, Cloudera`s revenue and outlook came in below Wall  Street`s expectations.  The cloud software company also reported that its  CEO is stepping down and retiring and it all sent the stock initially lower  after-hours on top of a more than 3 percent decline during the regular  session today.  It closed at $8.80.  

HERERA:  As we`ve been reporting, mortgage rates have fallen pretty  dramatically over the last few weeks, hitting its lowest levels in more  than a year.  But curiously enough, demand for mortgages is not heating up.  
Diana Olick explains.  

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Mortgage rates are  down dramatically, but apparently not low enough to impress today`s  homebuyers who are still up against very high prices.  Total mortgage  application volume increased 1.5 percent last week from the previous week,  according to the Mortgage Bankers Association, but the gains were driven by  refinancing.  The average rate on the 30-year fixed with conforming loan  balances fell to 4.23 percent from 4.33 percent by the end of last week.   That`s for loans with a 20 percent down payment, and they`re even lower  this week.

With that savings, refinance volume rose 6 percent from the previous week,  and was nearly 33 percent higher than the same week a year ago, when  interest rates were significantly higher.  Refinances are particularly  rate-sensitive and the drop in rates added 2 million more borrowers to the  pool of those who could benefit from a refi, according to Black Knight.  
But mortgage applications to buy a home fell 2 percent for the week and  were barely 0.5 percent higher than the same one year ago.  So, really  flat. 

MEGAN MCGRATH, BUCKINGHAM RESEARCH GROUP:  I think lower rates are helping.   Inventory is going up a little, but that`s actually not necessarily a bad  thing.  We`ve had really low levels of inventory for a long time, and I  think that`s kept some buyers out of the market.  
OLICK:  While lower rates do help reduce monthly payments, the reasons  behind low rates, that is a deepening trade war with China and Mexico and a  weakening economy are more concerning, and consumers don`t want to see  trouble in the economy when they`re about to make their biggest investment,  that is buying a home.  

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

GRIFFETH:  And coming up, ever wonder what an $80 million penthouse looks  like?  Well, we`ll take you inside.  

GRIFFETH:  And finally tonight, call it the lifestyles of the very rich and  famous, Amazon (NASDAQ:AMZN) CEO Jeff Bezos is reportedly buying three  adjoining New York City apartments for about $80 million.  The deal is the  priciest ever for a Manhattan neighborhood south of 42nd street.  
Robert Frank is back to take us on a tour.  

NIKKI FIELD, SOTHEBY`S INTERNATIONAL REALTY:  When you step off the  elevator, what is your first experience?  Size does matter.  

FRANK:  You`re getting an exclusive look inside Amazon (NASDAQ:AMZN) CEO  Jeff Bezos` brand-new penthouse.  Before the richest man in the world paid  $80 million for this unit, plus the two apartments below, CNBC got an  exclusive tour with broker Nikki Field.  The sprawling 10,000 square foot  penthouse alone has five bedrooms including a massive, seven-room master  suite.  

FIELD:  The master bathroom has a priceless view of the Empire State  Building from the master tub.  

FRANK:  When we toured it, the master was furnished with a $5,000 Bentley  dog bed.  One level up is the sunlit lounge.  Just past the $23,000 glass  foosball table is a 5,000 square foot wrap around terrace, a private  elevator to the third level reveals another lounge, plus even more outdoor  space.  
FIELD:  This is what we refer to as view envy.  

HERERA:  Before we go, let`s take a look at final day`s numbers on Wall  Street.  The Dow gained 207 points, the Nasdaq was up 48, and the S&P 500  added 22.  

That is NIGHTLY BUSINESS REPORT for tonight.  I`m Sue Herera.  Thanks for  watching.  

We`d like to remind you that this is the time of year your public  television station seeks your support.  

GRIFFETH:  I`m Bill Griffeth.  Thank you very much for that support, by the  way.   Have a great evening.  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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