Transcript: Nightly Business Report – June 12, 2019

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.  

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.  


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.

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.

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.


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.

WACHTER:  Pleasure.

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.

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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