ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: One and done? The Federal Reserve lowers interest rates for the first time in a decade, but a single comment from the chairman sent stock on a volatile afternoon ride.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: That`s a wrap. Trade talks end with little progress made, leaving in place a major source of uncertainty for the market.
GRIFFETH: Worker dividend. That`s how a senator describes his bill that targets corporate buybacks which could hit a record this year.
Those stories and more on NIGHTLY BUSINESS REPORT for Wednesday, July 31st.
HERERA: Good evening, everyone, and welcome.
The Federal Reserve hasn`t cut interest rates since 2008, that is until today. The move was a controversial one and it comes at a time when the U.S. economy remains solid. The risks come from a slowdown in global growth, so the decision to lower rates is considered an insurance cut designed to help stave off the possibility of an economic downturn.
But the chairman signaled that this is not the start of a trend and stocks dropped sharply. The Dow Jones Industrial Average dropped 333 points to 26,864. It had been down more than 450 points. The Nasdaq slid 98 and the S&P 500 was off by 32.
Steve Liesman reports tonight from the Federal Reserve.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Federal Reserve cut interest rates for the first time since 2008, bringing the rate it controls for overnight lending among banks down by one quarter percentage point to a new range between 2 percent and 2.25 percent.
That is largely what the market expected but in a press conference after the statement came out, the Fed Chairman Jerome Powell appeared to dial back expectations for future cuts.
JEROME POWELL, FEDERAL RESERVE CHAIRMAN: The committee is really thinking of this as — as a way of adjusting policy to a somewhat more accommodative stance. We`re thinking of it as essentially in the nature of a mid-cycle adjustment to policy.
LIESMAN: Stocks sold off immediately as the market began to question whether the Fed will deliver the two additional rate cuts priced in. Powell later went on to clarify, saying he did not mean to imply the Fed was done after this single cut.
And, importantly, the Fed also provided further easing by ending the reduction of its balance sheet two months earlier than planned. The Fed in its statement explained that that rate cut comes amid a U.S. economy that`s still growing, but with growing concerns about overseas weakness.
POWELL: To insure against down side risks to the outlook from weak global growth and trade tensions. So, that is — in a sense, that is a risk management point, but that is a bit of insurance. But we also feel like weak global growth and trade tensions are having an effect on U.S. economy. You see it now in the second quarter. You see weak investment, you see weak manufacturing. So, support demand there, and also to support return of inflation at 2 percent.
LIESMAN: Powell did not have the full support of his committee. Two Fed bank presidents dissented saying they wanted to hold interest rates unchanged.
Asked how investors can know what comes next for the Fed, Powell said there is no experience among central banks in knowing how to respond to global trade wars. He said the Fed is, quote, learning by doing.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman in Washington.
GRIFFETH: And joining us to talk more about the Fed, the economy and the stock market reaction, we have with us tonight Richard Fisher, the former president and CEO of the Federal Reserve Bank of Dallas, and Michael Hartnett, the chief investment strategist at Bank of America (NYSE:BAC) Merrill Lynch.
Good to see you both. Thanks for joining us tonight.
RICHARD FISHER, FORMER PRESIDENT, DALLAS FEDERAL RESERVE: Thank you.
MICHAEL HARTNETT, BOFA MERRILL LYNCH CHIEF INVESTMENT STRATEGIST: Good evening.
GRIFFETH: Richard, if you were with the Fed, how would you have voted and why?
FISHER: I would have accompanied Boston and Kansas City. I think it was an important thing for them to do. It shows that there is not consensus on the need to cut. Eric Rosengren of Boston is particularly, one of the great thought leaders on the Open Market Committee was when I was on the committee, remain so. And Esther in Kansas City is similarly well- respected.
I think it was very important by the way to send a signal to the president of the United States, whose reaction thus far has been fairly mild, that it is an independent body. The Federal Reserve Bank presidents are not appointed by the president. They`re not confirmed by the United States Senate. It is structured that way on the Open Market Committee so you can have independent views, and I think it was actually a very important development.
So, there are two things that happened there. One, it shows that there`s not full consensus the economy is weakening, mainly because consumption is strong. Personal spending in the last report was up 4.1 percent the last GDP report.
FISHER: Consumption drives the economy.
And then, secondly, showing that it is an independent body and the president cannot induce the committee to do what he wants for political purposes. I think it is a win/win decision. I`m glad they did it the way they did it and it is clear that they`re going to have to think about things if they want to continue. I think basically they`ve given back the December rate increase.
FISHER: And we`re now at the neutral rate, and I think they`re comfortable with it.
HERERA: Michael, what did you make of the market`s reaction? I mean, it was widely anticipated that we would get exactly what we did in terms of an interest rate cut today, but was it simply the messaging from the Fed chief? What is — what is responsible for the sell-off?
HARTNETT: I think the bottom line is they didn`t ease. You know, when you cut interest rates, you know, if you are really easing and providing stimulus, your currency goes down, the yield curve steepens, and corporate bond spreads, you know, forward. None of those things happened today. The Fed cut 25 basis points, the dollar was up, spreads widened, the yield curve flattened.
So Wall Street`s view really is there was no easing of policy, you know, today. Wall Street clearly wanted more and Wall Street still has a problem with the communication of the Fed and what the Fed is really trying to identify as the thing that it will really anchor policy going forward.
We all know inflation is incredibly low. We know the global economy is not doing well. We know the U.S. economy is doing rather well. So, you know, people are very, very uncertain as to what the Fed`s intentions and what is leading the Fed going forward from here.
GRIFFETH: Michael, does this change anything about your view of the stock market, whether or not they — the market is expecting another rate cut in September, by the way.-
HARTNETT: Yes, I mean, look, today was the 728th time that a central bank has cut interest rates since Lehman Brothers went under. In fact, Brazil just cut rates, so 729 now.
The markets are up massively since then. The markets love interest rate cuts. The markets are addicted to liquidity.
So, you know, I think that, you know, part of the reason, you know, we`ve been very bullish this year is we`ve seen a pivot by the central banks, everyone has been bearish. You know, expectations that the global economy will find a trough. I think it tempers the upside for markets in the near term without question. We will have to just see what the credit markets do. That will be very important.
HERERA: Richard, the Fed chief made note of the fact that there`s some uncharted territory here in terms of the trade negotiations, the trade tensions and the situation between the U.S. and China. How do you think they`re going to navigate that?
FISHER: Well, I`m sort of doubly hexed because I was the U.S. trade representative under President Clinton and then I was on the Federal Reserve, FOMC for 10 years, when I was head of the Federal Reserve Bank of Dallas. I think it`s pretty clear, though, that monetary policy cannot offset protectionism. If they cut 100 basis points it wouldn`t change the trade dialogue.
So, they`re trying to think this thing through. I think that`s one point. The other point which I think is important to bear in mind is, just because the European Central Bank and the Bank of Japan are following absolutely unprecedented radical monetary policy, negative interest rate policy, it doesn`t mean the Fed should follow suit. And I think that`s one of the assumption of the markets.
One of the things that I worry about, Sue, again, I ran a hedge fund for ten years before I did all of this other stuff, is I really do believe markets are hearing what they want to hear.
FISHER: They`re not listening to what`s actually being said.
This has been signaled, Eric Rosengren in Boston had a good interview with your folks at CNBC, making it very clear, very logical what he was spelling out. The market tends to ignore him.
The market is wishing, wishing and wishing for help. When you cut interest rates it changes the way you discount the present value of future cash flows.
FISHER: We did that deliberately when we poured on, went to zero interest rates and poured on three rounds of quantitative easing. That was the purpose, sent a signal to the market. Discount future cash flows in the last February of 2009 literally to infinity and the market has been doing that.
Now, that process is slowly being unwound. It is painful for the markets. I don`t expect them to necessarily cut. I think it is one and almost done for a while. It depends on the data as Powell has said.
GRIFFETH: Indeed, they`ve been data-independent for many years. Richard Fisher, Michael Hartnett, good to see you both. Again, thanks for joining us tonight.
FISHER: Thank you.
HERERA: More evidence that the U.S. economy remains steady. According to a new report, companies added more jobs than expected in July. ADP says private payrolls increased by 156,000, showing that firms are still willing to hire despite economic uncertainties such as the ongoing trade fight with China.
GRIFFETH: But there are more signs of slowing growth overseas. For example, the Eurozone`s economy expanded by just 0.2 percent in the second quarter. It was half of what the prior quarter`s growth rate was.
This latest report increases the chances that the European Central Bank will launch stimulus measures this fall. And then in China, factory activity there contracted in July for the third straight month, deteriorating global demand led to a decline in export orders and total new orders also moderated.
HERERA: Over in Shanghai, trade talks between the U.S. and China ended with few signs of progress.
Eamon Javers is at the White House.
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was smiles and handshakes in Shanghai as U.S. and Chinese negotiators wrapped up two days of conversations on the fate of the trade relationship between the economic superpowers. But while the body language was positive, the outcome was less than clear. The White House released a statement calling the talks constructive but not listing any specific outcomes. Instead they said the two sides discussed a range of topics, including forced technology transfer, intellectual property rights, services, nontariff barriers and agriculture. The U.S. also said the Chinese, quote, confirmed their commitment, unquote, to increase purchases of United States agriculture exports.
DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We have people in China right now.
JAVERS: As negotiators were on the ground in Shanghai, the president suggested that the Chinese simply wanted to stall until after the 2020 presidential election. The Chinese made an accusation of their own as Chinese foreign ministry spokeswoman Hua Chunying said that the United States continued to flip-flop.
One concrete development that markets were looking for, the two sides said talks will continue. The next session will be in Washington in September.
For NIGHTLY BUSINESS REPORT, I`m Ayman Javers at the White House.
GRIFFETH: Despite those ongoing concerns over trade and today`s pullback, the major averages on Wall Street did close out July with gains for the second straight month. It was a month that saw the S&P and the Nasdaq both reach new record highs.
And still ahead, the fall-out from the grounding of Boeing (NYSE:BA) 737 MAX hit one of GE`s units.
GRIFFETH: General Electric (NYSE:GE) shareholders got welcome news today. Earnings topped expectations and the company gave an upbeat outlook for its cash flow. That`s a key metric watched by investors which shows how much money the company has left after paying for operating expenses and capital spending. The company said that the improvement came from a stabilization in its struggling power business, but shares today were off a fraction to close just above $10 a share.
HERERA: And analysts say if GE is to rebound further, it will need the help of its aviation division which makes jet engines, but GE aviation is wrestling with the impact of the grounding of Boeing (NYSE:BA) 737 MAX. And it`s not just GE. The fall-out is being felt from Washington to Wichita.
Here is Phil LeBeau.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Since the grounding of the 737 MAX, Boeing (NYSE:BA) has cut monthly production from 52 to 42. The ripple effect is being felt at GE`s plant in Cincinnati, Ohio, where it is still building engines for the MAX. But with delivery suspended, GE expects a $400 million hit in both the third and fourth quarters.
LARRY CULP, GENERAL ELECTRIC CEO: The 400 million of cash pressure here in the back half, 400 per quarter is, you know, what is likely to happen if we do not see a return to service.
LEBEAU: In Wichita, Kansas, where Spirit Aerosystems builds the fuselage for the MAX, they cut cost but have not laid off workers as they wait the see what happens next with Boeing (NYSE:BA).
TOM GENTILE, SPIRIT AEROSYSTEMS CEO: We`ve looked at slowing down production. We`ve looked at doing some temporary pauses in production. So we have all of that prepared to be able to implement, depending on when the MAX gets back into service.
LEBEAU: Boeing (NYSE:BA) expects the MAX to take off again later this year, provided regulators sign off on a fix for the plane`s flight control system. At a hearing on Capitol Hill, looking into the FAA`s oversight of the MAX, senators once again raised concerns about the plane`s future.
SEN. JOE MANCHIN (D), WEST VIRGINIA: I would say for the 737 MAX to get back into the air, every Boeing (NYSE:BA) official should be flying that plane for one month to make sure that we have the confidence for a passenger to get back on the plane.
LEBEAU: Boeing (NYSE:BA), airlines and suppliers close to the MAX program admit it will take some time to restore faith in the plane, when it is finally determined to be safe to fly again.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
GRIFFETH: Membership growth helped Humana (NYSE:HUM) post strong earnings, and that`s where we begin tonight`s “Market Focus”, with the health care company beating estimates, thanks to more sign-ups for its Medicare Advantage health plan. Humana (NYSE:HUM) also raised its full-year guidance and announced a $1 billion share buyback program. The stock rose more than 4 percent today to $296.75.
Southern (NYSE:SO) Company reported mixed results. It beat earnings estimates but missed on revenue, which was hit by the sale of Gulf Power (NYSE:GUL) and other assets and by lower electricity sales and usage. Shares rose more than 1 percent though to $56.20.
And strong sales of pickup trucks pushed Fiat Chrysler pastes past estimates. Profits in North America helped the automaker offset weak sales performance overseas. The company also kept its full year outlook intact and shares rose more than 1 percent to $13.19.
HERERA: Molson Coors missed quarterly estimates due to unfavorable weather conditions and declining demand, particularly its flagship brand Coors Light. Also, the brewers CEO will be retiring in September and will be replaced by the head of Molson`s U.S. subsidiary Miller Coors. Shares fell more than 5 percent to $53.99.
Bloomin` Brands missed revenue target as they saw a decrease in same-store sales at its Outback, Carrabba`s Italian Grill and Bonefish Grill restaurants. Shares fell more than 4 percent to $17.03.
And after the bell, Qualcomm (NASDAQ:QCOM) posted mixed results, beating earnings estimates but they missed on revenue. The chipmaker also issued light full year guidance. Shares initially dropped in after-hours trading. They closed the regular session down more than 2 percent to $73.16.
GRIFFETH: Companies are on pace to buy back a record amount of their own stock this year, and according to a new report from Goldman Sachs (NYSE:GS), the cost of buybacks has started to exceed company`s free cash flow for the first time since the financial crisis.
Meanwhile, today in Washington a new proposal from a prominent senator want share repurchase programs to directly benefit company employees.
Ylan Mui has details.
YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: For Senator Sherrod Brown buybacks are a symptom of a bigger problem on Wall Street.
REP. SHERROD BROWN (D), OHIO: Wall Street`s obsession for accumulating wealth for the people who already have it comes at the direct expense of American workers, all workers. We need to reorient our economy from Wall Street greed to the dignity of work.
MUI: To do that, the Democrat from Ohio proposed new legislation today that would require publicly traded companies to give each of their workers $1 for every $1 million spent on buying back their own stock. Brown calls this the worker dividend. So if a company spends $20 billion in share repurchases, each employee would get a one-time repayment of $20,000.
Brown singled out Walmart and J.P. Morgan as notorious offenders.
BROWN: The entry level of a J.P. Morgan Chase teller is about $35,000. You can`t support a family on that, compared to the $31 million the bank paid its CEO last year.
MUI: The worker dividend would be paid directly to the employees after the end of the fiscal year. The proposal would also lower the cap on the amount of shares that companies can repurchase from 25 percent of average daily volume to 15 percent. And the SEC would be in charge of enforcing the new rules.
But the U.S. Chamber of Commerce quickly opposed this idea as anti-growth.
DAVID HIRSCHMANN, U.S. CHAMBER OF COMMERCE: Putting the government in the middle of those decisions would actually harm everybody, including the employees who have a lot at stake, not only the future of their company and economic growth, but also their own retirement plans.
MUI: Brown is not the only one on Capitol Hill who wants to target buybacks. A bill from Democratic senators Chuck Schumer and Bernie Sanders requires companies to raise wages and provide more benefits in order to buy back stock.
Senator Chris Van Hollen wants to limit executives from trading after a buyback. Today, Brown acknowledged that his proposal won`t pass any time soon, but he said he`s prepared for this fight to last years.
For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.
HERERA: Ed Clissold joins us now to talk more about this and the overall trends that he is seeing in buybacks. He is chief research strategist at Ned Davis Research.
Welcome, Ed. Nice to have you here.
ED CLISSOLD, NED DAVIS RESEARCH CHIEF U.S. STRATEGIST: Good to be here.
HERERA: Obviously, there`s a lot of angst on Capitol Hill about the increased in buybacks and the consistency of some companies to buy back their shares. If Washington does get involved in some way, shape or from, what would the impact be?
CLISSOLD: Well, I think that companies would then do is find other ways to return capital to shareholders, and that`s really what buybacks have become. Because they are not taxed like dividends, companies have figured out that`s a more tax efficient way to do that. So, what you have seen is buybacks suffering over the last four quarters. They hit a record high of $750 billion for the S&P 500 companies, and that`s — that`s a 50 percent jump over what you saw before the tax cuts a couple of years ago.
GRIFFETH: Going back to that Goldman Sachs (NYSE:GS) report, the one stat that caught my eye was the idea that we`re at a point now where sometimes the cost of the buyback exceeds the cash flow that a company has.
Are we getting to a point now — I mean, buybacks have been going on for a number of years now and growing. Are we getting to a tipping point now do you think in the buyback process?
CLISSOLD: Well, I think there`s two things going on here. One is that companies could repatriate cash that had been overseas as a result of the tax cut. So you probably will see buybacks start to slow down as companies burn through that repatriated cash or cash, again, that was overseas for a long time.
The other thing is that companies tend to continue to buy back until the economy goes into a recession, and because that`s the quickest thing they can do to start to conserve cash. So I wouldn`t expect a huge drop-off in buybacks until the next recession.
HERERA: Do you see that as the biggest risk, right?
CLISSOLD: Yes. The biggest risk is — is, in fact, that when you get to the next recession because one of the side effects over the last few years is that buybacks have become a bigger and bigger percentage of daily volume. And so, if buybacks go away, obviously during a recession the stock market tends to fall, earnings tend to fall, but then you are going to take away a big buyer in the market, which had been companies buying back their own shares. So, that could make things even tougher during the next recession.
HERERA: Ed, thank you so much. Ed Clissold with Ned Davis Research.
Coming up, why Democrats are divided over health care.
GRIFFETH: A large fire has hit an Exxon plant in Texas. The Baytown complex includes a 560,000 barrel a day refinery. Its website says it is one of the largest integrated and most technologically advanced refining in petrol complexes in the world. The facility sits along the Houston ship channel, which is the nation`s largest energy port.
HERERA: The Trump administration is opening the door for allowing prescription drugs to be imported from Canada and other countries. The proposal is part of the White House`s push to try to lower the cost of medicines. Health and Human Services Secretary Alex Azar says that the process would be safe and effective with oversight from the FDA. Details were scarce however, and it`s unclear how soon consumers might see results.
GRIFFETH: Roughly half of the 2020 Democratic presidential hopefuls took the debate stage last night and health care was in the spotlight.
(BEGIN VIDEO CLIP)
SEN. ELIZABETH WARREN (D-MA), PRESIDENTIAL CANDIDATE: It keeps working great for the insurance companies and the drug companies. What it is going to take is real courage to fight back against them. These insurance companies do not have a God-given right to make $23 billion in profits.
SEN. BERNIE SANDERS (I-VT), PRESIDENTIAL CANDIDATE: The answer is to get rid of the profiteering of the drug companies and insurance companies —
(END VIDEO CLIP)
GRIFFETH: Clearly, the issue is dividing the party. Some candidates called the strategy of Medicare for All bad policy. Others said it would stabilize the system.
John Harwood is in Detroit tonight where the rest of the candidates are debating this evening.
John, what did we learn about the Democratic candidate`s stand on health care overall?
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, we learned most significantly that Elizabeth Warren is sticking strongly with her position that the private insurance industry should effectively be abolished as part of a Medicare-for-All plan. That`s a key divide in the race. It is not popular with voters to propose getting rid of the insurance industry.
Bernie Sanders is for it. Elizabeth Warren is for it, but Joe Biden is not. She was challenged by other moderates on the stage last night — John Delaney, Tim Ryan, Steve Bullock, people like that, who said, don`t go that far, that`s too far for our electoral good. It may be too far to get through Congress.
HARWOOD: But Elizabeth Warren stayed there. If she`s the nominee, she will be hearing about that in 2020.
HERERA: What about the contrast on other economic issues, John?
HARWOOD: Well, you have a big tax contrast. Elizabeth Warren again, the policy leader in the race, proposed a wealth tax. She jousted with John Delaney over whether or not the wealth tax was a good idea.
John Delaney, the moderate Democrat from Maryland said, yes, taxes on the wealthy should go up but not in that way. And Elizabeth Warren kind of glee rubbed her hands together when she was talking about going after the wealthy, Delaney`s money, again, a moment that she may see again when we get to 2020.
GRIFFETH: And tonight, Joe Biden and Kamala Harris (NYSE:HRS) among those taking the stage. Do we expect anything different tonight?
HARWOOD: Well, I expect Joe Biden making the same contrast with Warren and Sanders that the moderates last night made. There`s an added dimension though, in light, especially of President Trump`s behavior in recent days. Joe Biden will be flanked by Kamala Harris (NYSE:HRS) and Cory Booker, two senators from California and New Jersey who are African-American.
The issue of race was put on the table by Kamala Harris (NYSE:HRS), given Joe Biden`s long record in the first presidential debate on MSNBC. They`re going to go after him and he is going to try to respond on that. That adds a different and more volatile element to this contest.
GRIFFETH: John Harwood in Detroit — again, thanks, John.
HERERA: Before we go, here is another look at the day`s final numbers from Wall Street. The Dow dropped 333 points. It had been down more than 450. The Nasdaq slid 98 and the S&P 500 was off by 32. The major averages were all higher however in July.
Welcome to August.
HERERA: That is NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have great evening. See you tomorrow.
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