ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Tame inflation. Consumer prices have barely budged and that could put pressure the Fed to cut interest rates sooner rather than later.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Facebook (NASDAQ:FB) under fire. E-mails have reportedly surfaced that could potentially link CEO Mark Zuckerberg to controversial privacy practices.
GRIFFETH: Rolling along. Why General Motors (NYSE:GM) is spending millions to pick up production of pickups.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Wednesday, June 12th.
HERERA: And good evening, everyone, and welcome.
It is often called the great rate debate, and tonight, that debate is coming into focus following the release of the latest economic report. It showed core inflation is cooling. That could bolster the case for the Federal Reserve to cut interest rates, something that`s been a point of contention for the market and something investors are watching closely since the central bank and low rates have been a pillar of support for the decade-long expansion.
Steve Liesman starts us off tonight.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Low inflation which the Fed had suggested was transitory hung around in May and failed to transit out of the economy. Headline inflation rose just a tenth of a percent, leading to a decline in the year over year rates just 1.8 percent and core inflation that takes out food and energy rose a tenth for the fourth month in a row, leading the year over year rates decline to 2 percent.
All of this means the Fed continues to miss its inflation target and at least markets to beat the Fed will cut interest rates to stoke the economy and try and revive inflation. The odds of a rate cut as soon as July spiked to as high as 84 percent, though something the market is getting ahead of the Fed.
LIZ ANN SONDERS, CHARLES SCHWAB: I think there is a risk that maybe the market has gotten too aggressive in terms of what it`s pricing in for the Fed. The Fed has been pretty clear that they want to see the actual data in the economy and that they`re not going to be swayed simply by market action, but let`s assume they are swayed by market action. The latest market action does not point to a need for a rate cut as early as June. I mean, maybe you get it in July, but I think they`re going to actually want to point to something in the data that`s concrete.
LIESMAN: There`s a distinct tale of two economies in the data. Service inflation remains a fairly robust 2.7 percent year over year, but commodity and goods prices appear to be back in deflationary mode, dragging down the overall averages and there`s a bit of debate over what role tariffs are playing in inflation, some see them driving up goods prices and others see them weakening the economy and driving down prices.
The Fed may want to wait and see how it all plays out before acting. Tariff issues right now look anything but transitory, and that means a complicated outlook for the economy for months to come.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
GRIFFETH: Karissa McDonough joins us right now to talk about the factors from tariffs to inflation data that will go into any decision the Fed makes on interest rates. She is fixed income strategist with People`s United Advisors.
Karissa, thanks for joining us tonight.
KARISSA MCDONOUGH, FIXED INCOME STRATEGIST, PEOPLE`S UNITED ADVISORS: Thanks very much for having me.
GRIFFETH: And for the record, you are forecasting maybe a couple of rate cuts, maybe July and September. How much of that is contingent on Chinese tariffs remaining in place?
MCDONOUGH: I think a good portion of that, in fact, we were really only looking for one hike before September, but the continuation of tariffs make us think that we really need to think about the Fed stepping in here and forcing the hand of, you know, whether it`s the market or just getting ahead of it. So, yes, those two hikes for sure, by September and that`s where we`re standing today.
GRIFFETH: And how important is each individual data point to the fed at this point? And also the conditions of the corporate credit market as well because the data`s been somewhat mixed, which is complicating things for the Fed.
MCDONOUGH: That`s right. Well, the Fed needs to build its case in terms of making these cuts. Kind of their shadow third mandate behind inflation and employment has been financial market stability. So they do pay attention, to a degree, to what the stock market is reacting to, but we haven`t seen that type of reaction from the credit market.
So, they`re really concerned about what each data point is showing them and the fact that inflation continues to not be at their target is a concern and it has been the cause of rate cuts in past cut cycles and we believe that that`s going to be the case this time around, as well.
GRIFFETH: Let me pursue again on the Chinese tariffs. Let`s assume that we get a deal in the near-term or let`s assume we get a rate cut of some kind and then suddenly the tariffs go away. Does that mean the Fed has to raise that rate that it just cut?
MCDONOUGH: No. That`s an excellent question. I would go back to comments that were made earlier in the show. We really only had monetary policy for the past ten years and it`s been a struggle to have fiscal policy here driving the economy. So that`s where we are today.
I mean, tariffs were potentially a drag or a deflationary measure on the global economy and just to have those removed doesn`t mean that, all of a sudden, we`re in a global reflationary environment. So I think a Fed cut, coupled with the tariffs potentially being taken away, those would be positives and not inflationary to the degree that the Fed will be concerned.
GRIFFETH: All right. Karissa McDonough with People`s United Advisors — again, thanks for joining us tonight.
MCDONOUGH: Thanks so much.
HERERA: That tame inflation report was not enough to give the market a lift. Stocks fell for a second straight day as questions about trade policy remain. Bank and tech stocks led the way lower. The Dow Jones Industrial Average fell 43 points to 26,004. The Nasdaq was down 29 and the S&P 500 slipped five.
And today, oil prices sank 4 percent on supply concerns. A new report showed a large increase in crude stockpiles for the second straight week.
GRIFFETH: And when it comes to the economy, chief executives are not as confident as they once were. According to a new survey from the Business Roundtable, optimism has declined for the fifth straight quarter. The CEOs say that they`re concerned about trade relations with China and the resulting uncertainty about global growth. So their plans for hiring and capital investment have declined, as well, in the second quarter.
A separate survey shows that two-thirds of chief financial officers see a recession coming by the end of next year. They expect their business prospects to decline as a result. The cause, well, they cite tariffs and credit risks.
HERERA: It is no secret that Facebook (NASDAQ:FB) has been plagued by privacy concerns and problems. Tonight, a new report and possible e-mails that link CEO Mark Zuckerberg to those controversial practices. That sent Facebook (NASDAQ:FB) shares lower by more than 1-1/2 percent.
Julia Boorstin has the details.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: “The Wall Street Journal” reporting that Facebook (NASDAQ:FB) e-mails uncovered as a result of the Federal Trade Commission`s privacy investigation suggest Mark Zuckerberg was aware of privacy problems at Facebook (NASDAQ:FB). The question, whether emails revealed practices that violate Facebook`s 2011 commitment to the FTC that it would protect users` privacy.
The article pointing to an exchange before the FTC consent decree went into effect, in which Mark Zuckerberg asked employees about an app that claimed to have compiled tens of millions of users` data, inquiring if that was possible, and that Facebook (NASDAQ:FB) should stop that kind of stockpiling.
Facebook (NASDAQ:FB) suspended that particular app Zuckerberg asked about, but “The Journal” notes that Facebook (NASDAQ:FB) did not take broader aggressive steps to protect users` policy.
Facebook (NASDAQ:FB) responding: We have fully cooperated with the FTC`s investigation and at no point Mark or any other Facebook (NASDAQ:FB) employee knowingly violate the company`s obligations under the FTC consent order, nor do any emails exist that indicate they did.
Senator Warner, who`s been critical of Facebook`s privacy practices, addressed this report on CNBC today.
SEN. MARK WARNER (D-VA): Part of the challenge with a lot of the tech companies is the founders, when they — when they were great innovators, but they oftentimes created a sprit class of stock in terms of founder stock that means in many ways they get to enjoy the benefits of the public company without some of the oversight and restrictions. So, I think this is an issue that`s candidly bigger than just Facebook (NASDAQ:FB).
BOORSTIN: This comes as we await the FTC settlement with Facebook (NASDAQ:FB) over its privacy violations which Facebook (NASDAQ:FB) has said will include a fine of up to $5 billion.
For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.
GRIFFETH: And as we have been reporting, Facebook (NASDAQ:FB) is one of those companies that has come under increased scrutiny from regulators who are investigating potential antitrust issues.
But as Ylan Mui reports now, it`s not just federal officials who are eyeing big tech.
YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big tech backlash isn`t just happening in Washington. Some of the loudest criticism of companies like Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) is coming from the states. New York has opened investigations into Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB). Mississippi is preparing an antitrust case against Google (NASDAQ:GOOG). California has passed a tough new privacy law to rein in the industry.
XAVIER BECERRA, CALIFORNIA ATTORNEY GENERAL: Government from the feds on down treated the Internet industry with a lot of care, kid gloves because they want to spoil what we saw coming — lots of new businesses, lots of new jobs, lots of increased economic capacity.
They`re not children anymore. They`re adults. They should be treated like adults and we`ll see where that takes us.
MUI: Today, state A.G.s gathered in Nebraska to meet with the Federal Trade Commission. That`s one of the agencies responsible for taking on monopolies. The Department of Justice is the other one, and both are looking into complaints that the tech giants are locking out their competition.
In a speech last night, the DOJ`s top antitrust official says his office will not shrink from the critical work of investigating and challenging anti-competitive conduct.
But states argue the feds aren`t doing enough. Thirty-nine states and the District of Columbia are now calling for tougher enforcement and more data protection. They said they don`t want new technologies to get snuffed out.
JEFF LANDRY, LOUISIANA ATTORNEY GENERAL: Google (NASDAQ:GOOG) gets to pick the winners and losers because the system is rigged in their favor in ripe with conflicts.
MUI: Google (NASDAQ:GOOG) declined to comment for this story and an industry group said tech companies aren`t monopolies and the Internet has brought consumers more choice than ever before.
For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.
HERERA: It is time to take a look at some of today`s “Upgrades and Downgrades”.
Cisco (NASDAQ:CSCO) was downgraded to market perform from outperform at William Blair. The analyst cites tightening demand which could pressure growth. The firm also takes note of new competition. Shares fell 2 percent to $55.86.
And Beyond Meat was downgraded to market perform from outperform at Bernstein. This is its second downgrade in as many days. The analyst cites the stock`s valuation. The price target is $123. Despite the downgrade, the stock which has been volatile rose 12 percent to $141.97.
GRIFFETH: NXP Semiconductor was upgraded to overweight from equal weight at Morgan Stanley (NYSE:MS). The analyst cited margin improvement at the company. Price target now, $114. But shares did fall more than one and a half percent to $93.76 today.
Brinker International (NYSE:EAT) was upgraded to outperform from market perform at Telsey Advisory Group. The analyst cited the restaurant company`s partnership with delivery service door DoorDash. Price target: $47. That stock rose more than 1 percent to $40.50.
HERERA: Still ahead, after a cool spring, is the summer home selling season about to heat up?
GRIFFETH: And FAA officials said today that Boeing (NYSE:BA) 737 MAX aircraft may not be back in the air until December. That is a date much later than earlier forecasts expected. The official emphasized though that there is still no official timeline.
But the CEO of American Airlines says he expects the aircraft to be flying by mid-August. Doug Parker also told his an airline annual shareholders meeting today that he expects the grounding of the 737 MAX to cost American Airlines about $350 million. As you know, that plane has been grounded since mid-March.
HERERA: The mega deal between United Technologies (NYSE:UTX) and Raytheon (NYSE:RTN) promised to redefine the aerospace industry. But in the days following the announcement, questions about the proposed get-together have started to swirl.
Morgan Brennan explains.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It could be the biggest defense deal ever, but Wall Street isn`t convinced on the merger of United Technologies (NYSE:UTX) and Raytheon (NYSE:RTN).
Pershing Squares` Bill Ackman opposes the deal, telling United Technologies (NYSE:UTX) in a letter that it, quote, “Makes no sense to us why you would consider a stock acquisition using today`s massively undervalued UTC common stock to buy a large business of inferior quality to the company`s existing businesses.” And another activist investor Dan Loeb`s Third Point is reportedly against it as well. Both hold less than 1 percent stakes in the United Technologies (NYSE:UTX).
Many Raytheon (NYSE:RTN) shareholders owned it as a stable income-producing investment. United Tech investors are betting on a soon-to-be pure-play commercial aerospace manufacturer, once the carrier building systems and Otis elevator units are spun off.
And that`s why some analysts are skeptical too, calling it a re- conglomeration that muddies the investment thesis for shareholders, with few cost savings and a lot hanging on execution.
Raytheon (NYSE:RTN) declined to comment but United Tech saying, quote: We are confident that our shareholders will see the merits of this transaction and the value it brings to them and the company. We will be working diligently in the days and weeks ahead to make sure that the details of the transaction are presented to and fully understood by all shareholders.
Meantime, the stocks have fallen since the deal announced Monday and the selling has spread to the broader aerospace and defense group.
Bottom line: investors wonder whether this signal is a top for defense spending and whether the steel in particular will pay off.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan at the New York Stock Exchange.
GRIFFETH: A new tech company soars in its trading debut and that`s where we begin tonight`s “Market Focus”.
Shares of CrowdStrike surged in its first day of trading after pricing its IPO at $34 a share. That values the company at $612 million initially. The cyber security firm provides cloud-based security to companies like Amazon (NASDAQ:AMZN) Web Services and to Credit Suisse.
The CEO said the company has an important role to play.
(BEGIN VIDEO CLIP)
GEORGE KURTZ, CROWDSTRIKE CEO: The problem that most companies are trying to solve is not being breached and whether that`s, you know, network technology or endpoint technology, at the end of the day, we see the tip of the breach being the endpoint. That`s where the data resides, the servers, the endpoints, the desktops, and that`s what we`re protecting.
(END VIDEO CLIP)
GRIFFETH: Shares jumped in its debut by 70 percent to $58 even.
Elsewhere, Wells Fargo (NYSE:WFC) is warning that its annual revenue is going to likely come in at the low end of expectations. A bank executive said the current rate environment has already been factored into that outlook, but a decline in interest rates could pressure revenue even further. And the stock drop nearly 3 percent today to $44.91.
Johnson & Johnson (NYSE:JNJ) and Colgate-Palmolive (NYSE:CL) have both been found liable in the case of a woman who blamed the company`s talc products for her rare cancer. A California jury concluded that asbestos found in Johnson & Johnson`s baby powder and Colgate`s cashmere bouquet powder caused her mesothelioma, which is a cancer specifically linked to asbestos exposure.
J&J shares were up more than 1 percent today, while Colgate-Palmolive (NYSE:CL) stock was down a fraction.
HERERA: The toymaker Mattel (NASDAQ:MAT) rejected another merger offer from the Bratz doll maker MGA Entertainment. According to MGA`s CEO, Mattel`s board felt that the latest proposal was not in the best interest of the company and its shareholders. Mattel (NASDAQ:MAT) shares were up more than 5 percent to $11.38.
Investors had their first chance to respond to comments from Tesla CEO Elon Musk. Musk told shareholders that the electric automaker has, quote, a decent shot at a record quarter and that there is not a demand problem for his product. Musk also said it won`t be long before the company has an electric car with a range of 400 miles. Shares nonetheless were down more than 3 percent to $209.26.
And after the bell, Lululemon posted better than expected earnings and saw revenue rise by 20 percent. Lululemon cites investments in its stores and its online operations. The stock initially rose in after-hours trading but closed the regular session down a fraction to $170.89.
RH, which is the retailer formerly known as Restoration Hardware, raised its forecast and downplayed the impact from higher Chinese tariffs. The company said it renegotiated product costs and raise prices to mitigate the effects. It`s also moving production out of China and is looking to expand its manufacturing operations here in the U.S. The stock soared in initial after-hours trading. It finished the regular session at $94.89.
GRIFFETH: Borrowers saw an opportunity last week and, boy, did they take it. Applications for new mortgages surged, thanks to a big drop in rates, and the housing industry is hoping that it jump-starts some sales after an unremarkable spring season.
Diana Olick is in Washington.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: A huge reaction to the big drop in mortgage rates total mortgage application volume surged nearly 27 percent for the week, up just over 40 percent annually. That`s according to the Mortgage Bankers Association`s seasonally adjusted index. And most of that was thanks to a refi boom. The average rate on the 30- year fixed fell to 4.12 percent for loans with a 20 percent down payment, and that`s the lowest level since September of 2017.
Now, refi has reacted up percent on the week and nearly double compared with the same week a year ago. Lenders must have been busy for sure, volume is up big in the past four weeks on these falling rates.
MATTHEW GRAHAM, MORTGAGE NEWS DAILY COO: It`s not nearly enough to get us back up to the refinancing surges that we`ve seen in the past in 2016, and then the huge numbers in 2011 through 2013, but it`s definitely a welcome relief for a mortgage market that was pretty borderline depressed heading into the end of 2018.
OLICK: Homebuyers also finally saw the light. They hadn`t really reacted to the rate drop the week before but purchase mortgage applications were 10 percent higher for the week and compared with a year ago. Purchase applications might have been even higher but there may be some pullback from buyers who are concerned about all the economic uncertainty with the trade war. Buyers are also still facing a tight and pricey housing market.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
HERERA: So, let`s turn now to Susan Wachter to talk more about the housing market and its reaction to interest rates. She is a professor of real estate and finance at the University of Pennsylvania`s Wharton School of Business.
Welcome back, Susan. So nice to see you again.
SUSAN WACHTER, THE WHARTON SCHOOL PROFESSOR OF REAL ESTATE & FINANCE: Pleasure to be here. Thank you.
HERERA: What do you make of the erratic nature of the housing market right now and its reaction to interest rates? I mean, yes, Diana pointed out the surge on refis. But interest rates have been low for a long time and we haven`t seen that kind of action.
WACHTER: Well, this is a price point in terms of interest rates. It`s a dramatic drop to 4.1 percent. We`re getting to historic lows. So, both refi opportunity is out there and opportunity to buy now lock into those fixed-rate mortgages at this 4.1.
It`s a significant decline. The decline is over time but compared to a year ago, its 100 basis points. Almost that`s big.
GRIFFETH: Is this a reason the Fed should cut interest rates at some point this summer, to try and revive what has been a more of a housing market this spring?
WACHTER: Well, yes, it`s almost — it could go in either direction because the housing market — these are signs that`s that it is back in play, that it`s not just refi, it`s also applications for purchases and we see some slowing down in the gains of prices, yes. But a 3.6 percent price rise which well is what we are facing now is moderating, it`s not a decline, it`s moderating.
At the high end, we see, of course, some decline in prices and multi- family, there is a excess supply out there. But entry-level prices are still daunting. Always lower interest rates are good for the housing market.
HERERA: But you make the point that homeownership has not really increased meaningfully since the depth of the financial crisis.
WACHTER: This is true. There are still our millennials — millions of millennials and there are somewhat older and younger peers who are out there still one-third living at home, still one-third renting, an all-time high rate at the age points that they are. So, there`s room for more growth in homeownership and demand for a single-family housing, and there sure is still an affordability crunch. They`re not fringe, not coming from interest rates, but coming from tide credit and high housing prices.
GRIFFETH: We`re going to do the stirring a little bit about how the treasury is really shut down the possibility of the SALT deductions coming back again, the state and local taxes. How much is that had an impact on housing as well?
WATCHTER: Well, it has, at certain geographies, not nationwide. But high- end and — if I may say so, red states, New Jersey, California in particular markets, we can see that it has effect of those markets.
HERERA: Susan Wachter with the University of Pennsylvania`s Wharton School of Business, thanks so much.
GRIFFETH: And coming up, GM`s latest push into profit rich pickups.
HERERA: The Treasury Department has dealt a final blow to any SALT workaround. SALT, as Bill mentioned, refers to the deduction of state and local taxes that were capped in the new federal tax law. The regulation bars municipalities in high-tech states from creating charitable funds that could then be used to fund daily operations. House Democrats had been working on a plan to increase the SALT deduction but it is unclear what would happen if that measure actually reached the Senate.
GRIFFETH: And over in China, auto sales declined for an eleventh straight month. Sales in May fell by 16 percent from a year earlier, and experts say the drop is due in part to waning confidence in the economy there. The industry is also facing new emission standards which go into effect next month.
HERERA: Ford is recalling more than 1 million Explorers over a problem with the suspension, which can become damaged when driving over rough terrain. The SUVs are from the model years 2011 through 2017. The automaker said it will spend about $180 million to fix that issue which will come at no cost to the cars owners.
GRIFFETH: With auto profits being squeezed by higher costs and slowing sales, automakers are investing more in the one segment still rolling along, that would be pickup trucks. And today, GM said it`s going to spend another million dollars to help increase production at its plant in Flint, Michigan.
Phil LeBeau takes us along for a ride.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is ground zero in the battle of the big pickups. Just three months after GM said it would hire another 400 workers and ramp up production at its Flint, Michigan, plant, the automaker is making yet another investment of $150 million, to help truck assembly lines run more efficiently.
MARK REUSS, GENERAL MOTORS PRESIDENT: We`re selling everyone we can make literally, and that`s on our retail basis. So our retail share is in great shape and now we`re getting we`re getting to fan that out across the commercial fleets and across everybody that wants you know a work truck that makes a living with it.
LEBEAU: While overall auto sales have cooled off as buyers show less interest in cars, they are still buying trucks at a healthy clip, especially at Fiat Chrysler and Ford, where full-size pickup sales climbed in the first quarter. By comparison, GM`s truck sales fell almost 14 percent. GM blames some of that decline on a transition from previous versions of the Chevy Silverado and GMC Sierra into newer versions of those trucks, and as sales increase, GM expects to raise production.
REUSS: This is really all about bringing up, you know, our general assembly and our processing to be able to get another 40,000 units out of this plant which we think is a great upside for us.
LEBEAU: Pickup trucks are among the most profitable vehicles for automakers, so they consider investment in those models to be money well- spent.
And for GM, that investment has been paying off. In the first quarter, the average price paid for a new Silverado or Sierra was up almost $6,000 compared to the previous model.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
HERERA: Before we go, here`s a look at the final numbers from Wall Street today. The Dow fell 43 points, Nasdaq down 29, S&P 500 slipped by five.
And that is NIGHTLY BUSINESS REPORT tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a wonderful evening. See you tomorrow.
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