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.
For NIGHTLY BUSINESS REPORT, I`m Robert Frank.
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.
CRAIG DISMUKE, VINING SPARKS CHIEF ECONOMIST: Hey, good evening, Sue.
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.
(BEGIN VIDEO CLIP)
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.
(END VIDEO CLIP)
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.
For NIGHTLY BUSINESS REPORT, I`m Robert Frank.
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.
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