ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Pieces of the puzzle. The health of the economy is a tricky thing to figure out, but a few clues surfaced today ahead of the Fed chair`s trip to Capitol Hill.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: New debate. Why investors across the country are now asking if the central bank should be independent from politicians.
HERERA: Galactic feat. Richard Branson wants to take tourists into space, and he`s making it possible for investors to be part of his venture.
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, July 9th.
GRIFFETH: And we do bid you a good evening, everybody, and welcome.
Investors are clearly in wait-and-see mode. They`re waiting to see what the Fed chair of the Federal Reserve says about the economy and the direction of interest rates when he testifies on Capitol Hill tomorrow.
In the meantime, a relative calm has settled over Wall Street. The Dow Industrials today fell just 22 points to 26,783. The Nasdaq was up 43 and the S&P added three points. But that calm could lead to volatility when Jerome Powell starts speaking. As usual, the Fed chief faces a tough task. He is under pressure from the administration to cut interest rates, but he has said that monetary policy should not be influenced by short-term political interests.
One thing is clear though. The economy may be growing, but that growth is slowing. And today, some of the pieces to the economic puzzle fell into place.
HERERA: And the first piece came from Pepsi. The company reported higher quarterly profit and sales. Now, part of that was Pepsi specific, tied to its new products and higher pricing, but the company also said its results were helped by a strong consumer, which accounts for more than two-thirds of economic activity.
Sara Eisen has more.
SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Consumers are indulging in Fritos and Cheetos and Pepsi just in a smaller portion. That`s the takeaway from a nice quarter of growth at PepsiCo, highlighted by 4.5 percent organic revenue.
Here are some of the highlights. Frito-Lay continues to be a big driver, and because more people are buying smaller bags of snacks or at least 10 packs or 12 packs of small bags, Pepsi gets more pricing out of it, which does drive sales growth.
Also brand Pepsi, especially those smaller cans, is growing, thanks also in part to new flavors like Lime Pepsi or Mango Pepsi.
And Quaker is also growing again for the first time in years, thanks to a big marketing boost for some of its other brands that you find in your pantry like Aunt Jemima.
CFO Hugh Johnston says most of the portfolio right now of snacks and drinks is doing well in most corners of the globe.
HUGH JOHNSTON, PEPSICO CFO: We are seeing terrific results out of our North American business. We`re seeing a real acceleration there. North American beverage is clearly doing better and all of our international business is performing well, developing in emerging markets, growing about 8 percent.
EISEN: What else is helping PepsiCo right now? A stronger consumer. That goes for the U.S. and around the globe.
JOHNSTON: I think consumers are healthy, and particularly with our level of products. We represent little treats that really make people`s days better. So wherever I look around the U.S., whatever geography I look in, it seems like the consumer is in a pretty good spot right now and willing to spend on our products.
EISEN: The market has caught on to the higher growth prospects of PepsiCo. Its stock, up almost 20 percent so far this year, outrunning archrival Coca-Cola (NYSE:KO) and other consumer staples. It`s considered safe during a time of lower interest rates and uncertain economic environment.
But as Pepsi showed today, it`s also in the growth camp.
For NIGHTLY BUSINESS REPORT, I`m Sara Eisen.
GRIFFETH: Now, the next growth piece of the puzzle came from the auto sector, considered one of the most important in the country. New data out of Mexico showed the U.S. is importing a record number of cars and trucks from south of the border, just more proof that the U.S. auto industry has become more entrenched in Mexico despite threats from Washington to tax vehicles imported from that country.
Phil LeBeau has details.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: From assembly lines in Mexico to showrooms in the U.S., the number of autos imported from south of the border is picking up speed. In the first half of this year, the U.S. imported almost 1.4 million vehicles from Mexico, up 13 percent compared to a year ago.
And even though overall auto sales have edged lower in 2019, the percentage of models coming from Mexico has increased. That`s because the number of vehicles imported from that country is on pace to top the all-time high set just last year.
All of this irritates President Trump who has complained about automakers building cars and trucks in Mexico instead of the U.S. Last month he briefly threatened to put a series of escalating tariffs on everything imported from Mexico, including auto parts and finished vehicles.
Still, automakers like BMW made it clear last month they would not shift production gears due to the president`s threats.
OLIVER ZIPSE, BMW BOARD MEMBER: We will keep our plants and we will see how far that goes, and, as I said before, our production network is flexible but at this point in time, we would not see any reason to change our current plans.
LEBEAU: With its new plant in San Luis Potosi, BMW now ships its most popular car, the 3 Series, into the United States from Mexico, not from Europe.
And auto production south of the border is set to grow even more. Late this year or early next year, Toyota (NYSE:TM) is set to open a new plant in Central Mexico that will build SUVs, many of which are likely to be sold in the United States.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
HERERA: Today, Mexico`s finance minister abruptly resigned. That heightened investor concerns over the new government`s economic policy and its ability to meet some of that country`s financial challenges. Many saw Carlos Urzua as committed to budget discipline just as the new administration ramps up social spending. His exit sent the peso lower.
GRIFFETH: All right. Tomorrow as we reported, Fed Chair Powell will testify on Capitol Hill. In addition to answering questions about the economy, he`s also expected to defend the central bank`s independence.
Steve Liesman picks up that part of the story from there.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The firing of Turkey`s central bank chief this past weekend and President Trump`s threats to fire or demote the chairman of the Federal Reserve has sparked a debate in this country, should the central bank be independent from politicians?
The president believes he can fire Fed Chairman Jay Powell. And here is what his top economic adviser Larry Kudlow said on the question before.
INTERVIEWER: Jay Powell`s job is safe?
LARRY KUDLOW, NEC DIRECTOR: Yes, I believe it is. I will say that there is no effort to remove him. I will say that unequivocally. At the present time, yes, he`s safe.
LIESMAN: There was a definite attempt by Congress in the Federal Reserve Act passed originally in 1913 to give the Fed independence by making it difficult though not impossible for presidents to fire chairman and governors once they`re in office. The idea, keep the politicians from pumping up the economy through monetary policy for just political purposes.
But Joachim Fels at PIMCO wrote of recent developments, quote, the heyday of central bank independence now lies behind us. In a world of rising populism, disinflationary pressures, low interest rates and bloated central bank balance sheets, independent monetary policy increasingly looks outdated.
Kudlow said he believes in Fed independence, but —
KUDLOW: That word “independent” doesn`t mean they operate from another planet. The Fed reports to Congress, and that`s in the — in the Constitution, and the Fed is appointed, or the governors are appointed by the president. So, I think that in a day-to-day sense certainly they`re independent, but that doesn`t mean that they shouldn`t listen to advice from their elders.
LIESMAN: That advice from the president, also from Kudlow, is for the Fed to cut interest rates to accelerate growth as we head into a coming election year, just the sort of thing a Congress from earlier in the last century was trying to avoid by granting the Fed independence.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
HERERA: The number of job openings fell slightly in May but remained near record levels. According to the Labor Department, a little more than 7 million positions were posted, suggesting that hiring is unlikely to slow dramatically even though the economy has softened a bit. This report is considered a measure of labor demand.
GRIFFETH: Small businesses are considered the engine of job creation in this country, and today, a new survey showed that sentiment among small business owners dipped a bit, mostly due to the uncertainty from tariffs. But despite that pullback, optimism among business owners does remain relatively high.
HERERA: So, yes, there are some signs that economic growth is slowing, but it is still considered healthy. However, the bond market is saying something else. The yield on the short-term treasury has been higher than longer term treasuries for more than 30 consecutive trading sessions.
Now, it is a phenomenon which is known as an inverted yield curve, and that tends to happen before recessions.
We`re joined now by Jack McIntyre with Brandywine Global Investment to talk more about this.
Welcome, Jack. Nice to have you here.
JACK MCINTYRE, BRANDYWINE GLOBAL INVESTMENT MANAGEMENT: It is nice to be here.
HERERA: You say that the treasury yield curve is sending some warning signs to the Federal Reserve. What might they go?
MCINTYRE: So I think the key message that the yield curve and the bond market in general is sending the Fed is that, hey, we`ve got low inflation and, you know, surprisingly it is not transitory. It is the secular disinflationary influences keeping a lid on cyclical — the business cycle- type inflation.
So the Fed shouldn`t be worried that inflation is going to get out of hand. They should be more worried that, hey, this low inflation is sticking around too long.
GRIFFETH: I think you would agree that there`s a sub plot to all of this that will face Jerome Powell tomorrow in Washington. If he decides to cut interest rates at the end of the month, do you think that emboldens his critics who have been calling for a rate cut of some kind? And, conversely, if it doesn`t cut rates, do you think he risks his job?
MCINTYRE: So that`s an interesting one because I think historically, all of this stuff is supposed to be happening behind closed doors. We`re just seeing it in the — you know, the world now tweeting, it is all happening in front of our eyes. So I think he is going to rise above it, and what is going to drive him is sort of the growth outlook for the U.S., the global economy in general, inflation.
So I think the Fed is positioned to cut by 25 basis points at the end of this month and then we will have to go from there, no matter if they are getting pressured to cut further or not. They`ve got to show that they are purely or truly independent.
HERERA: So what is the data telling you then? How do you think the Fed is going to look at it? I mean, the data is slowing slightly. The U.S. is still pretty strong, but the global economy is weakening. So where does that put us?
MCINTYRE: So the way I`m thinking about it is that what the Fed should do isn`t look at today`s data. And you`re right because the U.S. economy is doing well. Consumer confidence is still pretty high.
But, you know, I think they need to think in terms of sort of an insurance policy cut. Be preemptive. The U.S. is just not economic island. Global economy is softening and we`re not going to be immune to that. And without inflation, why not cut rates now and send a message to the market say, hey, wait a second, we`re not cutting 100 basis points like the market has priced in, but we`re going 25 and we`re going to sort of re-evaluate.
HERERA: Well, we will see.
Thank you so much, Jack. Jack McIntyre with Brandywine Global Investment.
GRIFFETH: Time to take a look now at some of today`s “Upgrades and Downgrades”.
3M (NYSE:MMM) was downgraded today to sector perform to outperform at RBC Capital. The analyst says 3M`s reputation as a defensive high-quality industrial stock is eroding. He cited litigation and macro pressures facing that company. Price target, $176. The stock fell 2 percent today to $165.70.
Marriott was downgraded to neutral from overweight at J.P. Morgan. The analyst cited a deceleration in industry trends as well as that stock`s valuation. Price target, $138. That stock fell more than 1 percent to $139.52.
HERERA: Square was upgraded to market perform from underperform over at Raymond James. The analyst cited the company`s credit card business, which is gaining traction among other things. This call ends the firm`s bearish stance on the stock since January. Shares were up 6 percent to $77.96.
Several analysts initiated coverage of Chewy, with five placing a hold rating on the stock including Morgan Stanley (NYSE:MS). The analyst at that firm cites the company`s valuation and says investors need to wait for a pull back before buying. The price target is $33. The stock fell 3 percent to $33.29.
GRIFFETH: Still ahead, is Boeing (NYSE:BA) on the verge of losing a title it has held for years?
HERERA: Drugmakers got a lift today following a legal setback for a Trump administration rule. The White House wanted drug manufacturers to list prices in their TV ads. The rule was set to go into effect today before being blocked, and that sent shares of companies like Merck (NYSE:MRK), Pfizer (NYSE:PFE) and Eli Lily higher.
GRIFFETH: Qatar plans to purchase aircraft from Boeing (NYSE:BA). President Trump made that announcement from the Oval Office.
(BEGIN VIDEO CLIP)
TRUMP: They`re buying tremendous amount of military equipment, including planes, and they`re buying commercial planes. As you know, a very large number of commercial planes from Boeing (NYSE:BA), and we very much appreciate it.
We`re going to be signing a document today, a very large transaction. You`re going to be invited to the signing. It`s a transaction that will be purchasing a lot of Boeing (NYSE:BA) jets and a lot of money spent in our country. And that means a lot of jobs.
(END VIDEO CLIP)
GRIFFETH: The president did not, however, indicate whether that deal was a new one or whether he was referring to a previous one last month at the Paris Air Show. Qatar said it would buy five Boeing (NYSE:BA) 777 freighters for about $1.8 billion.
HERERA: Boeing`s deliveries though sag, and that is where we begin tonight`s “Market Focus”.
In first half of the year the company`s deliveries fell more than 30 percent. Boeing (NYSE:BA) also reported no new orders of its 737 MAX aircraft as that plane still remains grounded after two deadly crashes. At the same time, rival Airbus is set to pass Boeing (NYSE:BA) as the world`s largest plane maker for the first time in seven years. Still, Boeing (NYSE:BA) shares were up a fraction to $353.09.
Cisco (NASDAQ:CSCO) is buying Acacia Communications for more than $2.5 billion or $70 a share. Cisco (NASDAQ:CSCO) hopes that deal will help its networking business by adding optical technology. Cisco (NASDAQ:CSCO) shares rose a fraction to $56.34. Acacia soared 35 percent to $64.91.
GRIFFETH: Shares of dialysis companies DaVita (NYSE:DVA) and Fresenius dropped after word that the White House is reportedly planning to overall this country`s kidney disease treatment market. “Politico” reports that President Trump is going to announce initiatives to have more kidney treatments performed at home rather than in clinics with the government`s intention to reduce care costs. Shares of both those companies, DaVita (NYSE:DVA) and Fresenius, fell about 5 percent in today`s trade.
And then after the bell, Levi Strauss posted better than expected revenue, thanks to an increase in its consumer and wholesale business. The denim company also saw sales increase the most in Europe, followed by Asia. Shares initially dropped after hours but closed the regular session up more than 2 percent at $23.66.
HERERA: It has been just over a year since President Trump flew to Wisconsin and declared that American manufacturing had been reborn. The president helped break ground on the first U.S. factory for Taiwanese electronics manufacturer Foxconn. But you know what they say about the best laid plans.
Scott Cohn is in Wisconsin tonight.
SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is not what was advertised.
TRUMP: This is the eighth wonder of the world.
COHN: A $10 billion factory, building giant video displays, employing 13,000 people. A year later, still no plant and a tiny fraction of the jobs.
Governor Tony Evers, elected last year as part of the backlash, is trying to adjust the state to the new reality.
GOV. TONY EVERS (D-WI): We now have clarity exactly what this first phase is going to look like.
COHN: In his first national interview about the project, Evers says he and the company have now reached an understanding.
EVERS: They`re going to be making smaller items, probably tablets, glass for cabinet — tablets and phones and things like that. They`re looking at, I think it was 1,500 employees, which certainly is less than the original thought.
COHN: But 1,500 is a far cry from 13,000.
EVERS: Well, we will take one step at a time.
COHN: Foxconn says it will keep its promise, eventually.
PETE BUCK, FOXCONN PROJECT EXECUTIVE: I have talked to our corporate and they have reiterated that we are committed to 13,000 jobs.
COHN: If it doesn`t hire all of the workers, it doesn`t get all of the money, but close to a billion is already spent on infrastructure and land.
Kim Mahoney`s house is the last one standing.
KIM MAHIONEY, MOUNT PLEASANT HOMEOWNER: The homeowners didn`t know that we would be directly impacted until the day of the public announcement.
COHN: Are you comfortable with how this was done?
EVERS: Well, no, I never have been. It became part of the campaign, frankly, you know, Donald Trump coming and saying it is the eighth wonder of the world, all of that stuff. I think — I think it set people up for expectations that probably could have been handled differently.
COHN: Kim Mahoney doesn`t know what to hope for. She and her husband refused a buy out offer from the village saying it was too low. Now their neighbors are gone and Foxconn is closing in.
MAHONEY: Why is economic development necessary to improve things? What is wrong with farming in rural areas? I mean, that`s why we moved out here.
COHN: But with jobs and bragging rights at stake, that`s a view most state governments just don`t share.
For NIGHTLY BUSINESS REPORT, Scott Cohn, Mount Pleasant, Wisconsin.
GRIFFETH: Tonight, the business world is mourning the loss of Ross Perot. The billionaire businessman and one-time presidential candidate lied at his home in Dallas. He made his fortune in the tech industry, founding electronic data systems in 1962 and then Perot Systems in 1988.
But the public came to know him when he ran for president in 1992 as an independent, emphasizing his political outsider status. He focused on cutting the national debt, protecting American workers from outsourcing, and he was a critic of the North American Free Trade Agreement. He received 19 percent of the popular vote. It was the highest percentage won by an independent candidate since 1912.
Ross Perot was 89 years old.
Virgin Galactic is preparing for lift-off. Richard Branson`s venture is merging with an investment firm which would result in the company becoming the world`s first publicly traded space tourism venture.
Morgan Brennan has more on the great space race.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A turning point for investing in commercial space as Virgin Galactic now looks to go public. Social Capital Hedosophia, which is a special purpose acquisition company or SPAC, will invest about $800 million for a 49 percent stake in the space company.
Social capitalist Chamath Palihapitiya, who is personally investing his own money, will become chairman.
CHAMATH PALIHAPITIYA, SOCIAL CAPITAL CEO: This thing looks like a software business under the hood even though it is flying people to space. So, this is, I think, actually a really compelling risk/reward. I mean, taking a general step back, I think I had a really good track record right now of being a little bit ahead of some big trends, whether it was a transition to Amazon, whether it was backing bitcoin, things like Slack.
What I will tell you is I generally don`t put my own principal capital on the table unless I think there`s a compelling risk/reward and I`m doing it here.
BRENNAN: Virgin Galactic is a space tourism company charging $250,000 to take customers to the edge of space. It expects to begin doing so within a year. And so far, over 600 people have already signed up, with another 2,500 also apparently expressing interest.
Sir Richard Branson believes this will be one of the big new industries of the future.
SIR RICHARD BRANSON, VIRGIN GROUP FOUNDER: The market is enormous, and the amount of people that would love to go to space is enormous. And once we have a lot of spaceships, which, you know — I mean, it will hopefully enable us to build a lot of space ships, the price will start coming down. That will increase the market even more.
BRENNAN: Palihapitiya says he expects Virgin Galactic to become profitable on an annual basis by August of 2021. And that`s five to ten years from now, it won`t be just about trips to the edge of space but also hypersonic travel around the globe.
PALIHAPITIYA: What Richard`s team has built are technologies that eventually can be used in a hypersonic airplane. So, what does that mean? That means if you are used to a ten-hour flight from Los Angeles to Tokyo, or Los Angeles to Beijing, that becomes less than two hours. Now, that alone, if you look at the ticketing revenue for that in the airlines, that`s $300 million of revenue that should vaporize (ph).
BRENNAN: Meantime, Virgin Galactic isn`t alone in the space tourism race. Jeff Bezos` Blue Origin is developing a suborbital trip of his own and both SpaceX and Boeing (NYSE:BA) recently received approval to begin carrying private astronauts into orbit to the international space station as soon as next year.
But with Virgin going public, the stakes are high, and investors in the sector watching closely, since this will be a first that could create a lot of benefits but also means less margin for error. After all, as the saying goes, space is hard.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.
GRIFFETH: Meanwhile, “Shark Tank`s” Kevin O`Leary recently took a tour of Virgin Galactic`s hangar when it was in Mojave, California. It has since moved to New Mexico, but his guide was none over than Richard Branson.
KEVIN O`LEARY, SHARK TANK INVESTOR: I`m landing in the Mojave Desert to meet Sir Richard Branson at his Virgin Galactic headquarters. This is where the famous billionaire is pouring hundreds of millions of dollars into building a rocket ship so civilians can travel into space.
Few people have been to this place and I`m dying to see what is inside.
Richard, my friend. Good to see you again.
BRANSON: Well, welcome to our factory.
O`LEARY: Whoa! This is it?
BRANSON: This is the space ship.
O`LEARY: This is huge.
BRANSON: Yes, the space ship is not enormous but it takes eight people.
O`LEARY: Two pilots, six passengers?
O`LEARY: What you`re looking at is Virgin Galactic`s mother ship. The spacecraft is the fuselage at the center. It`s attached to this giant carrier jet that flies high up into the atmosphere.
BRANSON: And lift the craft, it will take up to 50,000 feet, and then they will release the spaceship.
UNIDENTIFIED FEMALE: Three, two, one, release, release, release.
O`LEARY: Then what happens?
BRANSON: He fires the rocket.
UNIDENTIFIED MALE: Fire, fire.
O`LEARY: That takes it up into space?
BRANSON: You then hold on for dear life as it goes 3,000 miles an hour in eight seconds straight into space and you have the ride of your lifetime.
O`LEARY: Even more impressive is the fact that Branson already has a long list of people who dropped $250,000 to get on board.
Seven hundred people have given you a quarter of a million dollars a piece.
O`LEARY: That`s about $89 million. Do you have a guesstimation when this would be profitable?
BRANSON: About 18 months time approximately I would say.
O`LEARY: That soon?
BRANSON: Yes, the moment we can start sending people to space, which is likely to be at the end of the year, we`ll start making money back.
O`LEARY: Among the 700 are really big names you`d recognize. Reportedly, Justin Bieber, Katy Perry and Brad Pitt signed up for this six-figure ride.
How long are you up there for?
BRANSON: So the whole — the whole trip is about 3 1/2 hours. The amount of time in space is not massive, maybe ten minutes.
O`LEARY: Are you weightless at that time?
BRANSON: Unbuckle, you float about. We have big windows. You can look back on the earth.
UNIDENTIFIED MALE: Oh, that is a million dollar view out the window.
O`LEARY: It costs $250k for a seat, which buys you about ten minutes in space. That comes out to 25,000 smackeroos per minute.
Everybody wants to see inside that thing. I`m not leaving until I see inside —
O`LEARY: Are you kidding? You`re not letting me see it? Why?
BRANSON: Tomorrow this goes to space, and I just wouldn`t want you to touch anything.
O`LEARY: I`ll take my shoes off before I go in.
BRANSON: It is very kind of you. We`ll take the shoes, they`re quite nice shoes.
O`LEARY: For me personally, it is less about being the first kid on the block. I want to see other people survive this thing, and when they do I definitely want to get in that space ship and become an astronaut.
Now having seen it, I have the bug.
BRANSON: Good. I look forward to getting you up there.
O`LEARY: But I want a deal. I`m not paying 250.
O`LEARY: Hey, that`s what happens.
BRANSON: We`ll take him up there, push him out I think.
GRIFFETH: Richard Branson goes first, then Kevin, then maybe I`ll think about it. We`ll see.
HERERA: I will not, but that`s OK.
That does it for us tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a great evening. See you tomorrow.
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