ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.
(BEGIN VIDEO CLIP)
JEROME POWELL, FEDERAL RESERVE CHAIRMAN: Uncertainties around trade tensions, concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.
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BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: The Fed chief signals an openness to a rate cut and the market respond. The S&P breaks through 3,000 for the first time ever and the Nasdaq closes at a record.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Battle for content. Major media players are in Sun Valley as the industry enters a new era and competition among streaming services intensifies.
GRIFFETH: The top state for business. Why Amazon had it right when it chose Virginia for its second headquarters.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Wednesday, July 10th.
HERERA: Good evening, everyone, and welcome.
Well, the stage is set and investors cheered. Federal Reserve Chair Jerome Powell bolstered the case for a possible interest rate cut when policymakers meet at the end of the month. He suggested that lowering the benchmark rate would bolster growth and cited a number of uncertainties here and around the globe.
That lifted optimism on Wall Street, sending the Nasdaq to new highs and the S&P 500 briefly through the 3,000 mark before it pulled back. The Dow Jones Industrial Average rose 76 points to 26,860. The Nasdaq was up 60 and the S&P 500 gained 13.
We have two reports tonight. Bob Pisani is at the New York Stock Exchange, but we begin with Steve Liesman and the Fed.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fed Chairman Jerome Powell all but guaranteed the Federal Reserve will be cutting rates probably as soon as this month, that’s from a semiannual testimony in the House today. While he said the U.S. economy is in a good place, he emphasized trade uncertainty, global economic weakness and low inflation as the more important factors guiding Fed policy.
REP. ANTHONY GONZALEZ (R-OH): Would it be fair to characterize based on what we are seeing on those two factors specifically that a strong case could be made for lowering?
POWELL: So, yes. As I mentioned, we think that uncertainty around — around trade policy and also global growth, it’s not — it is not all down to trade policy.
POWELL: There’s something going on with growth around the world, particularly around manufacturing and investment and trade. And so, that uncertainty is we think weighing on the domestic economy.
LIESMAN: Powell said he was not swayed by the strong jobs report this past Friday and, in fact, said the economic data had continued to disappoint. That leaves the most important question. How many rate cuts after July?
Fed funds futures are pricing in a 100 percent rate cut in July. Markets see a 56 percent chance of yet a third rate cut in December for 75-basis point or three-quarters of a point of rate cut this year.
MICHELLE MEYER, BANK OF AMERICA: A 25-basis point cut, it seems very likely. In fact, there’s a decent possibility they could consider a 50-basis point cut. They want to be aggressive, they want to be early, and they want to ensure that this rate cut (ph) can continue and they’re not waiting to see evidence of slowing in the data.
LIESMAN: On a separate note, Powell was asked by Maxine Waters, chair of the House Financial Services Committee, if he thought President Trump could fire him.
REP. MAXINE WATERS (D-CA): Mr. Chairman, if you got a call from the president today or today and tomorrow and he said, I’m firing you, pack up, it is time to go, what would you do?
POWELL: Well, of course, I would not do that.
WATERS: I can’t hear you.
POWELL: Well, my answer would be no.
WATERS: And you would not pack up and you would not leave?
POWELL: No, ma’am.
WATERS: Because you think the president doesn’t have the authority, is that why you would not leave?
POWELL: I have — I’ve kind of said what I — what I’ve intended to say on the subject, and what I have said is that the law clearly gives me a four-year term and I fully intend to serve it.
LIESMAN: Stocks and bonds both liked the message from Powell on the outlook for interest rates. We’ll see if he continues that message in testimony before the Senate tomorrow.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.
GRIFFETH: And as Sue mentioned, investors did indeed like the Fed chief’s message, especially early in the trading day when all three major indexes hit intraday highs.
Bob Pisani is at the New York Stock Exchange.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stocks marched higher, pushing the S&P 500 beyond 3,000 early on though we did end well off the levels. Federal Reserve Chair Jay Powell testified before the House Financial Services today, reassuring the markets there’s a case to be made for a rate cut later this month.
In particular, Powell’s comments that uncertainties have increased pushed the S&P into record highs, but we came off those highs fairly quickly. We didn’t end above 3,000.
Right now, there’s a clear consensus in the markets around a 25-basis point insurance cut for July, some are calling it. Some investors likely would be surprised now if there was no rate cut, but others would be surprised if there was a 50-basis point rate cut. So, the consensus is just 25.
Sector winners today, big tech names like Micron, Cisco, Intel and Microsoft. They’re the same stocks that power us to 3,000 from 2,000. Energy was another bright spot. Crude oil prices are knocking on the door at $60 a barrel here. Crude inventory showed a much bigger drawdown than expected. That helped the big oil names Exxon, Chevron and Hess.
One group left out of today’s rally, bank stocks. J.P. Morgan, Fifth Third, all down as bond yields continue to drift lower.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
HERERA: The minutes of the Fed’s last meeting were also released today. They show officials growing more concerned about the economic outlook and many backed a move if the economy continued to struggle. Economists say that the minutes add to the sense that the Central Bank is prepared to lower rates when they meet at the end of the month.
GRIFFETH: Let’s turn now to Brian Nick to talk more about the Fed and the markets. He’s chief investment strategy at Nuveen.
Brian, thanks for joining us tonight.
BRIAN NICK, NUVEEN CHIEF INVESTMENT STRATEGIST: Thanks for having me.
GRIFFETH: As you heard, the guessing game has hit a new level today, the — it is either 25 or 50-basis points according to Morgan Stanley or Bank of America, but everybody seems to feel rates will be 75-basis point lower than they are today. What’s your guess?
NICK: I don’t think it is going to be necessary for the fed to go three times with rate hikes this year. I think what has been priced in —
GRIFFETH: Rate cuts you mean?
NICK: Rate cuts. I’m sorry.
GRIFFETH: We’re used to that.
NICK: We’re only six months removed from rate hikes, so I’m still adjusting to new reality.
NICK: So, we do think they will go at the end of this month. If Chair Powell wasn’t intending to cut rates at the end of this month, he would have had to say so today and he obviously did, and then the very high likelihood that they will go again in September and probably pause.
And the hope I think on the Fed’s part and on our part is that by the end of the year some of the risks that the Fed is concerned about will have dissipated, that global growth will be showing signs of being on the upswing and at least of these sources of policy uncertainty, whether it’s the debt ceiling, or Brexit or even a potential deal on the U.S. and China on trade, at least those risks will not have gotten worse and that they’ll feel comfortable that they’ve done enough.
HERERA: So — but the equity markets, the rally in the equity markets have been to a certain extent built on the expectation of the rate cuts. What’s your outlook of equities if indeed we do get that cut in July?
NICK: Yes, so the stock market in the U.S. is up about 20 percent year-to-date. Our midyear outlook is to expect a tougher climb. That’s particularly true when we think of U.S. stocks which we don’t think are poised to give nearly the returns they did in the first half of the year, because once these rate cuts are sort of priced in, that’s the market basically saying, look, we need some help from the Fed, we think we’re going to get the help.
Even if the Fed follows through and cuts rates two or even three times, it’s going to be hard for the markets to rally further, especially given the fact what we’re concerned about in the next couple of quarters is a very soft period for corporate profits. At the end of the day, if corporate profits aren’t growing, there’s only so far the markets can travel upwards.
GRIFFETH: And then there’s the story, the bond market seems to be telling as we continue to see yields go lower there, in some cases to three-year lows. How do we reconcile that with what the equity market has been doing?
NICK: It’s not typical that you have a prolonged period when bonds and stocks are rallying at the same time, and that is again another reason why we’re very cautious about the second half of the year for both fixed income and for equities, because this correlation probably isn’t going to last. It is going to resolve in some way, probably with interest rates rising moderately. Again, keeping that optimism alive for the end of the year with growth looking to be a bit better by Q4, which means the interest rate should go up a bit.
But also the reality of corporate profits and where valuations are, probably limiting the degree to which stocks continue to move up. So we’re looking at flattish returns for the rest of the year in stocks, flattish for bonds as well.
NICK: Unfortunately, for investors, the first half of the year was very good.
GRIFFETH: Indeed. Brian Nick with Nuveen — again, thanks for joining us tonight.
NICK: Thanks very much.
HERERA: Those comments from the Fed chair rippled through the housing sector, the idea being if the fed cuts interest rates, mortgage rates will dip, making home purchases more affordable. Lower rates would offer relief for homebuilders who have seen higher labor and land costs, giving that sector a lift today.
But there is another shift underway in the housing market and the change may be bad for buyers.
Diana Olick explains.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s all about supply. We have been in a pretty severe housing shortage for the past several years which meant as demand rose, prices did as well. But this year, we started to see more listings and prices easing, but that may be short lived. Supply is expected to drop again this fall and potentially hit a new low according to realtor.com.
Inventory gains began to slow this year from 6.4 percent growth in January to 5.8 percent in February. Gains continued to slow throughout the spring and supply was up just 2.8 percent annually in June. It’s now expected to flatten over the next three months and could hit its first decline in October of this year.
Of course, all real estate is local. The housing shortage is worsening in smaller, more affordable markets like Oklahoma City, Memphis, Raleigh, Richmond and Pittsburgh, according to Redfin. But in pricier markets where demand has fallen off like Seattle, San Jose, Denver, Chicago and Boston, the supply of homes for sale is increasing.
A looming shortage could help homebuilders but they still need to either lower prices or build more entry-level homes because that’s where demand is strongest and supply is leanest.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
GRIFFETH: More now on oil prices which, as you heard, settled at a seven-week high today.
Two things drove the rally. First, the government confirmed a larger than expected draw down in oil supply and second is that storm taking shape along the Gulf Coast. Forecasters warn that it could turn into a hurricane by the end of the week, and that has prompted the oil industry to shut in production and evacuate rigs ahead of time. So, domestic crude settled 4.5 percent higher today above $60 a barrel.
HERERA: It is time to take a look at some of today’s “Upgrades and Downgrades”.
Comcast was upgraded to buy from neutral and it was added to the conviction buy list at Goldman Sachs. The analysts cited the company’s strong fundamentals. The price target is $54. The stock hit a new high during the trading session to close at $43.79. Comcast is the parent company of CNBC which produces this program.
HCA Healthcare was upgraded to buy from neutral at Goldman Sachs. The analyst cites the health care services company’s bargaining power at the local level. The price target is $160. The shares rose 1 percent to $136.68.
Deere was downgraded to neutral from buy at UBS. The analyst says demand will likely weaken in the next one to two quarters as farmers hold back on purchases. The price target is $167. The shares fell 1.5 percent to $160.81.
GRIFFETH: We don’t often report from beautiful Sun Valley, Idaho, but once a year it becomes the center of the media world when Allen and Company hosts its annual conference. Over the years, the seeds of some of the biggest deals in history have been planted there. There was Jeff Bezos purchase of “The Washington Post”, Verizon’s acquisition of Yahoo, and most famously, Disney’s merger with ABC back in 1995.
But this year, the focus may be less on mergers and more on content. Julia Boorstin is there for us tonight.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: With media moguls such as Brian Roberts, John Malone and Greg Maffei arriving here in Sun Valley, one of the big topics is how the media and tech giants are battling with content, with a number of new streaming services set to launch from Disney, Apple, AT&T’s Warner Media and NBCUniversal.
BARRY DILLER, IAC AND EXPEDIA CHAIRMAN: No one is going to compete with Netflix in gross subscribers. I believe they’ve won the game and I think there’s nothing that I can see that’s going to dislodge them. Amazon is in a completely different business in that it’s selling Prime which gives you all sorts of services, just among them video and television. Disney has the best chance because of its very, very popular content.
BOORSTIN: With so many media and tech companies such as Apple and Amazon competing for premium shows and movies which Barry Diller calls an arms race, some of the companies here are looking for value elsewhere like Discovery’s David Zaslav which is building on his company’s strength with unscripted content around food, the home and science.
DAVID ZASLAV, DISCOVERY CEO: They’ve all kind of looked the same. Apple is doing it — scripted series, scripted movies. Great companies can be fighting over that market share, price of content going up. It’s great to watch. I think it’s great for consumers, but it is incredibly crowded.
BOORSTIN: With CBS and Viacom controlling shareholders, Sherri Redstone here, along with former 21st Century Fox CEO James Murdoch, industry veteran Michael Ovitz says it is way to soon to determine which of the tech and media giants will come out on top.
MICHAEL OVITZ, CAA FOUNDER: Netflix has the most extraordinary install base, an amazing head start. Disney has put together a phenomenal group of brands, and Warner, you know, has some track record over the years, plus HBO. And you’ve got Hulu out there, too. So, I think it’s just going to be a competitive environment.
BOORSTIN: And now, everyone is watching to see how consumers will respond to Warner Media’s upcoming HBO Max launching next spring, as well as Disney Plus and Apple TV Plus, launching this fall.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Sun Valley, Idaho.
HERERA: Still ahead, wages are ticking higher after being stagnant for years. But there is some concern that higher pay will threaten profit margins.
GRIFFETH: The White House is ordering an investigation into France’s plan to tax technology companies. The probe is going to examine whether France’s digital tax plan would hurt U.S. tech firms and unfairly target them. According to reports, the investigation could potentially lead to the U.S. imposing new tariffs or other trade restrictions.
HERERA: A new Goldman Sachs report says higher wages is putting pressure on corporate profit margins, and that S&P 500 companies could be affected the most by higher costs from a less competitive labor market.
So, how much of a threat could that be?
Matt Maley, equity strategist at Miller Tabak, joins us to talk about that.
Matt, great to have you here. Welcome.
MATT MALEY, MILLER TABAK EQUITY STRATEGIST: Thank you. Thanks for having me.
HERERA: So, tell me — you think it will have an impact on profit margins but maybe not right away?
MALEY: Yes, it is kind of interesting. It is definitely having a little bit of an impact. One of the one, of course, the concerns is that it is the boy that cried wolf. We heard for so many years that wages have to increase, wages have to increase, and they never have.
So, people have gotten to the point where they kind of dismiss it and have not built it into any of their assumptions. Now that we’re trying to — finally starting to see a little bit of that, it is going to affect not only earnings overall but a miss of earning expectations which is tough for stocks.
But there’s also a hidden danger that you alluded to, Sue. It is just that, you know, a lot of the companies out there, you get to a certain point and they’re not going to be willing to pay above that level and they have a lot of technology already in place to replace those workers.
GRIFFETH: Right. Yes, I mean it is — it depends on the sector of the economy we’re talking about. Technology, wages are going up. There’s no question about that. Health care, wages are still going up because demand is there.
But when you get into industries like, for example, food service where margins are slim to begin with, when wages go up — which they have been doing — that will cut into profit margins right away, won’t they?
MALEY: And there’s no question. At some point, there is a level where they will just change. I mean a great example is what happens with McDonald’s. I mean, they’ve had the technology in place for several years that can replace a lot of the people that work in their restaurants, whether it be making — cooking the food, at the cash registers, et cetera.
The one thing though is that all of their studies over the years told them, hey, it is good for us both economically and for public relations to hire people in the neighborhood. We want to be a good neighbor, we want to be a good partner within the neighborhood.
But there comes a level where it gets too expensive. It used to be at $15 an hour, now it is a little higher than that. But like I said, this technology is already in place, so it is not something that will take three years to implement.
MALEY: It will take a very short time. And that will get people suddenly with unemployment at a low level, it could start to creep up.
HERERA: And you mentioned the $15 mark, and a number of companies are phasing in that $15 mark. But at what point do you think we really start to see the impact? Is it at 15 or is it below 15?
MALEY: Well, I think 15 — it is depending on the company and obviously the industry. It depends on the area, too. A lot of people will say $15 in New York City doesn’t get you very far, so it is kind of a roving number or a wide range.
But I think anything, when you start to creep above $15, it definitely has an impact. Of course, a lot of the service jobs are ones that people don’t have the qualifications to do other things. If the unemployment rate goes up, it has an impact on earnings of other companies as it spreads through the system.
GRIFFETH: All right. Matt Maley with Miller Tabak — Matt, thanks so much.
MALEY: Thank you.
GRIFFETH: American airlines raises its revenue forecast, and that’s where we begin tonight’s “Market Focus” with the airline saying it has seen fuller flights and as a result, it anticipates up to 4 percent increase in its unit revenue. However, the carrier also did say its pretax profit would take about $185 million hit due to that prolonged grounding of Boeing’s 737 MAX planes. The stock today rose nearly 2 percent to $32.94.
Elsewhere, Amneal pharmaceuticals is looking to reduce its annual expenses through a newly-announced restructuring plan. The drugmaker has been dealing with supply issues for its epinephrine auto injectors, which are used to combat life-threatening allergic reactions. Shares lost more than a third of their value today falling 36 percent to $4.36.
And Chinese electric carmaker NIO today reported more deliveries than expected. The company said it delivered more than 1,300 vehicles in June. Just last week, recall that its U.S. rival Tesla exceeded its own delivery estimates. In fact, NIO was often called the Tesla of China. NIO was off a fraction today to $3.68.
HERERA: Vishay Intertechnology is cutting its quarterly outlook. Late today, the chipmaker said it is seeing weaker than expected demand from its distribution operations. Shares initially dropped in after-hours trading but closed the regular session up a fraction to $16.08.
And after the bell, Bed Bath and Beyond posted mixed results as it topped earnings expectations but fell short on revenue. The home goods retailer also saw a drop in same-store sales. Shares initially rose in after-hours trading. They closed the regular session up a fraction at $11.52.
GRIFFETH: Here we are in July. The start of the new school year may seem far away, but already retailers are gearing up for back-to-school sales. And this year, gadgets may take a bigger bite out of parents’ budgets.
Courtney Reagan has more.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: For millions of children in the U.S., school just let out for the summer, but back-to-school shopping is starting soon and expected to peak later this month and in early August. That’s when more than half of annual school-related spending happens and a new survey from Deloitte forecasts the total spent, nearly $28 billion, will be on par with last year.
It doesn’t mean the consumer isn’t healthy, but rather the back-to-school supplies are largely commodity type items. A pencil is a pencil for the most part. That ups the ante for retailers.
ROD SIDES, DELOITTE: You have to be sharper in terms of what the proposition is for the consumer. One of the questions we always ask is tell us what is important to you in terms of picking either the venue or the specific brand that you’re shopping. We hear over and over, it’s price, it’s product, it’s convenient.
REAGAN: Nearly 90 percent of shoppers say mass merchants, retailers like Walmart and Target, are the top destination for back-to-school. Online retailers like Amazon are now the second shopping preference for back-to-school. Some retail experts say Amazon’s prime day shopping holiday has helped it grab more school supply share.
JAN KNIFFEN, J. ROGERS KNIFFEN WWE CEO: Amazon is basically taking over along with Walmart and Target back-to-school, and electronics are an online business. Now, electronics is going to be the big growth area.
REAGAN: Deloitte says spending on electronics will surge nearly 30 percent with the growth coming from mobile devices. And the smartest shoppers, Deloitte survey says don’t procrastinate.
SIDES: Those who wait until the last minute spend more money than those who start in the middle of the peak.
REAGAN: About $370 more on average. Buyer beware.
For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.
GRIFFETH: And still ahead, the top state for business.
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SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT: When Amazon was choosing its top state for its $5 billion HQ2 project, it came here to Virginia. But how does Virginia stack up by the numbers?
I’m Scott Cohn. We’ll have this year’s rankings coming up on NIGHTLY BUSINESS REPORT.
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HERERA: The District of Columbia is suing Marriott over what it calls deceptive fees. The attorney general says the hotel did not disclose the additional mandatory costs up front to its customers in rates displayed online. The lawsuit alleges that Marriott made millions of dollars by violating consumer protection laws for at least a decade. It was filed after an investigation conducted by all 50 state attorneys general. Marriott says it does not comment on pending litigation.
GRIFFETH: CNBC is out with its annual list of the top states for business. All 50 states are graded on more than 60 measures of competitiveness including infrastructure, workforce and the cost of doing business.
This year, North Carolina came in at number three thanks to a strong state balance sheet and steady economic growth. At number two, Texas with a high growth rate and low unemployment. And, as you heard, topping the list, Virginia, thanks to its workforce and strong education system.
Scott Cohn has the story behind this year’s top state for business.
COHN: From the mountains to the sea, an American original and a business powerhouse.
UNIDENTIFIED FEMALE: Tonight, the celebrations have begun.
GOV. RALPH NORTHAM (D), VIRGINIA: — that Amazon has found its next home.
COHN: Virginia was already a winner, beating out more than 200 bidders for Amazon’s HQ2 project.
BRIAN HUSEMAN, AMAZON VP PUBLIC POLICY: We were really excited by Virginia, what it had to offer. Probably the most important thing was the attraction of this place to talent, and particularly tech talent.
COHN: The numbers bear that out. Virginia has America’s top workforce, smart and tech savvy, tied for the top in education, and number three for business friendliness with a bipartisan program to cut regulations.
MATT KELLY, JBG SMITH CEO: What functions very well in this state is government officials, business officials, local citizens groups. People talk to each other a lot.
NORTHAM: When businesses, large and small, want to call Virginia home, that is a one-two punch for our economy.
COHN: But not all is perfect.
PROTESTERS: What do we want? Resignation. When do we want it? Now!
COHN: The governor’s own history helped revive questions about the state’s inclusiveness.
NORTHAM: We are really focusing on those iniquities and our cabinet members are addressing those, but I want to let this country know and certainly Virginians know that we are an inclusive state.
COHN: And then there are the costs, an expensive place to live and do business. For now, it’s a price companies are willing to pay.
It’s no coincidence that the last time Virginia was this strong competitively was in 2011. After that, defense spending started to decline and no state is more dependent on the pentagon. Now, that budget is back and so is Virginia.
For NIGHTLY BUSINESS REPORT, Scott Cohn, Bentonville, Virginia.
HERERA: And before we go, here is another look at the day’s final numbers from Wall Street.
The Dow rose 76 points to 26,860. The Nasdaq was up 60 to close at a record. And the S&P 500 gained 13.
GRIFFETH: And I already saw a couple of traders on the floor of the New York Stock Exchange with S&P 3,000 hats there.
HERERA: Right. I’m sure they will have those on tomorrow.
That does it for us tonight. I’m Sue Herera. Thanks for joining us.
GRIFFETH: I’ll Bill Griffeth. Have a great evening. See you tomorrow.
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