TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: See you in December. That’s when the Fed said that interest rate hike is not just possible, but maybe even likely. What such a move would mean for your money.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Halftime report. We’re at the midway point of the earnings season, and it’s not just the dollar that’s keeping revenues down.
MATHISEN: Are you the life of the party? Why builders say only your kitchen knows.
All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, October 28th.
HERERA: And good evening, everyone, and welcome.
Well, that got our attention. The Federal Reserve today said a December rate hike is a real possibility. In its policy statement, the Central Bank left interest rates where they are right now but opened the door to a potential rise later this year, pointing specifically to its next meeting, the last one of 2015.
Stocks pulled back initially only to take off, rising more than 1 percent by the close. The Dow Jones Industrial Average gained 198 points to close at 17,779. The NASDAQ rose 65. The S&P 500 notched a 24-point gain. And the yield on the ten-year treasury rose.
Steve Liesman has more on the Fed’s assessment of the economy and what it might do next.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Some big changes in the Fed’s October statement that suggest a possible rate hike in December.
The Fed left interest rates unchanged, but it downgraded its concerns over global economic and financial development. It’s now monitoring those issues, rather than saying it’s worried about their effects on the U.S. economy and inflation.
Second, the Fed downgraded the job market, saying it slowed, even while it upgraded the consumer and business spending, saying they’re growing at a solid rate.
But here’s the big one, the Fed put a December rate hike back in play. The new statement says, “In determining whether it will be appropriate to raise the target range at its next meeting.” That’s new language, a clear warning from the Fed to markets to beware of a possible rate hike in December.
ALFRED BROADDUS, FORMER RICHMOND FED PRESIDENT: I think the committee knows that it’s sending a signal by making these changes. So, I think you have to think that the odds of a December increase are now a good bit higher than before the meeting. That said, let me just briefly add quickly that there’s still a ways to go before we get to that meeting. You’ve still got two labor market reports, a lot of other economic data.
LIESMAN: These changes reflect a sense that the Fed went too far in emphasizing the downside risk of global weakness at the September meeting. That prompted markets to overly price out the chance of a December rate hike. Now, the Fed in the new language has the flexibility to hike.
It doesn’t mean the December rate hike is a done deal. It does mean the December meeting is a live one where the Fed could hike, if the economy goes along pretty much as it’s been going. So, that means the bar may not be all that high.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman in Washington.
MATHISEN: And here to talk more about the Fed and the economy more broadly is Richard Fisher. He’s a former president and CEO of the Federal Reserve Bank of Dallas.
Mr. Fisher, it’s always great to have you here.
RICHARD FISHER, FORMER PRESIDENT & CEO, DALLAS FEDERAL RESERVE: Thank you.
MATHISEN: Take us inside the meeting room over the past couple of days, and then parse that statement that the Fed put out. Do you put as much importance on those words “at our next meeting,” as the popular press seems to? Is that a clear signal that a rate hike is coming in December?
FISHER: I actually don’t think there’s a whole lot that’s new in this statement. There was some change of emphasis. They took out this emphasis, for example, on international developments. But the chair herself and other members have been saying that they would consider raising or starting the beginning of raising rates before year end. In fact, right after the last meeting, the chair gave a speech in Massachusetts, Chairman Yellen.
So, I don’t think there’s a whole lot of new there, but clearly, December’s on the table. It makes sense. They give a press conference right afterwards. She can then explain it to the public, if they decide to move. But I thought Al Broaddus and Steve captured it properly — it’s there, it hasn’t been removed, it depends on the data that comes in between now and then.
HERERA: Richard, one —
FISHER: Yes, Sue?
HERERA: One of the things that the Fed has really pegged their next move to is a certain level of inflation in the economy.
HERERA: And we just aren’t seeing that. Should they change that view? Should they put aside the inflation equation of things or not?
FISHER: Well, they keep referring, as they did in this statement, to where they expected to move towards a 2 percent medium-term target. The operative word there is “medium-term”.
But personally, I think the emphasis is in the wrong place. What has happened with this hyper accommodative monetary policy is they have set the conditions for financial instability. They have pumped up the equity markets.
You just reported on what happened today. Again, we got this kind of reaction.
They have driven down interest rates. Normalization, which is the operative term within the Fed and at that table, means getting things back in order. We’ve had 60 percent of the last 15 years. We’ve had a negative real interest rate. That’s adjusted for inflation in terms of short-term money. And this distorts the way markets allocate resources.
So, I know they’re concerned about market stability, but they’ve — and I was part of this process for ten years, even though I dissented on QE3. One of the concerns was we’re creating artificial ways to discount future cash flows and distorting the marketplace.
So, this inflationary standard balance that they keep on talking about, employment inflation, that’s the mandate given by Congress, but there’s also an important mandate given by Congress, which is for having intermediate-term interest rates be better adjusted than where they are now. And I think that’s really the issue for the committee.
And whether they will take action, it becomes a trip wire that leaves to financial destabilization, or they could slowly normalize, prepare the market, as they appear to be doing, and therefore, not create a trip wire that could lead to financial chaos.
MATHISEN: Mr. Fisher, thank you very much, as always, for being with us. Great to see you again.
Richard Fisher, former head of the Federal Reserve Bank of Dallas.
FISHER: Thank you. Thanks so much.
HERERA: Well, financial stocks rose on the Fed’s statement, since banks tend to benefit from higher rates. Bank of America (NYSE:BAC) rose more than 5 percent with Citi, Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) all seeing gains as well.
MATHISEN: And oil prices rose alongside stocks. Crude posted its largest gain in nearly two months today, sparked by news of a U.S. export deal with Mexico.
This morning, that country’s state-owned oil company said it received permission to import thousands of barrels a day. By the settle, domestic crude prices rose more than 6 percent.
HERERA: But despite that rise in oil prices today, prices remain relatively low, and that’s caused the energy sector to be the biggest market loser this year.
But there has been a bright spot, and that’s the refiners. Late today, Tesoro said it would buyback up to $1 billion in stock.
And as Morgan Brennan tells us, other refiners are expected to have a solid quarter as well.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Oil and gas refining stocks soared nearly 20 percent so far this year. As earnings get under way, analysts say that rally could continue.
Valero Energy (NYSE:VLO) reported a 30 percent increase in profit today, beating estimates, thanks to strong demand for petroleum products and cheap crude. With oil prices cut in half since last summer, refiners have benefited from high crack spreads or margins representing the difference between the price of crude and refined products like diesel and jet fuel.
Refining operations, which are also known as the downstream business, helped British oil giant BP report better-than-expected earnings earlier this week as well. These dynamics have played out most of the year. And despite the fact that spreads are coming down and the high season for travel, summer, is over, many analysts expect refiner stocks to post another solid quarter.
Over the next several days, they say the key thing to watch will be management’s comments about gasoline demand heading into 2015. Valero says it expects demand to remain robust in the final three months of the year.
But there will be many others to watch, including independent refiners Marathon Petroleum and Philips 66, as well as integrated oil giants ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX).
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.
MATHISEN: Volkswagen posted its first quarterly loss in more than 15 years, fallout from the growing scandal involving the German automaker rigging the emissions of millions of diesel cars. That has hurt.
Phil LeBeau has more now on VW’s big loss and what’s ahead for the German automaker.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is something rarely seen at Volkswagen, a huge loss from a company famous for routinely racking up big profits year after year. But last quarter, Volkswagen lost more than $1.9 billion, largely because of costs linked to the company’s growing diesel emissions scandal. The German automaker has already said fixing millions of defective cars will cost at least $7 billion, and as a result, its earnings for 2015 will be significantly lower than last year.
CEO Matthias Muller says the company is moving quickly to make sure defective models meet pollution rules around the world.
MATTHIAS MULLER, VOLKSWAGEN CEO: The first and most important priority is helping our customers as quickly as possible and as comprehensively as necessary. Our engineering teams are working flat out to develop the technical solutions for the affected diesel vehicles. We are cooperating closely with all responsible authorities.
LEBEAU: Regulators have already approved VW’s plan for repairing diesel cars in Europe.
Meanwhile, Volkswagen has yet to come up with a solution in the U.S., where new diesel models remain parked at dealerships because they can’t be sold.
And in China, where Volkswagen is number one, there are fewer than 1,500 diesel VWs with rigged emissions. Still, it is a critical market for VW, which is why Muller will join German Chancellor Angela Merkel when she visits China next week. During that trip, Muller is expected to update Chinese authorities on Volkswagen’s handling of the diesel scandal.
Volkswagen is sticking with its guidance of global sales this year, topping 10.1 million vehicles, the same rate that it was at last year. But with two months left in 2015 and the diesel emissions scandal not showing any signs of slowing down, some wonder if VW’s sales will stay strong this year.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
HERERA: Recalls at Fiat Chrysler hurt the automaker’s results. The company reported a surprising third-quarter loss, which follows five consecutive profitable quarters. Despite the loss, though, Fiat Chrysler left its guidance for the year unchanged.
MATHISEN: And we are halfway through earnings season, and one common theme has emerged, and it is this — lower revenue. It’s not a new trend, but rather, one that has been playing out for the past six months or so. Many companies have been pinning the blame on a strong dollar, but this quarter, it’s not just the buck that’s causing problems.
Bob Pisani explains from the New York Stock Exchange.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: I’ve been telling you about the revenue recession that corporate America has been facing for the last six months. We are faced with the prospect of four consecutive quarters, potentially, of negative revenue growth in 2015. Companies cannot even beat the lowered revenue guidance for this quarter, the third quarter, with 20 percent of the S&P 500 reporting so far, 70 percent of the companies have beat earnings estimates, but only 38 percent have beat revenue estimates. That’s pathetic!
Why can’t companies get any revenue growth? There’s two problems. One is the strength of the dollar, which reduces the value of profits when you repatriate them from abroad. DuPont, for example, said yesterday that earnings for the full year are about 20 percent lower due to the strong dollar. That’s huge!
Now, some people have been arguing that there wouldn’t be a revenue recession if the dollar wasn’t appreciating, but that’s not quite true, because the other major problem is the global slowdown. Orders are down from many of the big global industrial and material companies, because they’re the ones most exposed to the slower economies of China and Brazil, for example, and it’s those companies, the DuPonts, the Cummins (NYSE:CMI), Packards (ph), the Textrons of the world, they’re reporting the biggest revenue misses.
Now, tech and health care, while they’re also exposed to the global economy, are in sectors with better growth prospects, and so, don’t have the big revenue misses. So, let’s call it a draw. The dollar and the slower global economy are the two major reasons revenues are slight, and let’s just leave it at that.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
HERERA: Still ahead, good medicine? What the big merger between Walgreens and Rite Aid (NYSE:RAD) could mean for you.
HERERA: Health insurer Anthem reported better-than-expected third-quarter results, raised its earnings forecast and added customers. Enrollment was particularly strong in government plans, especially Medicaid. But the company said spending on medical claims as a percentage of premiums rose, a key metric watched for signs of rising costs.
MATHISEN: The drugstore chain operator Walgreen (NYSE:WAG) Boots Alliance reported better-than-expected quarterly profit. The results were driven by cost cuts and more prescriptions being filled at its pharmacies, but the focus now is on the company’s acquisition of Rite Aid (NYSE:RAD) for $17 billion, a figure that includes debt. We told you about it last night and what it might mean for consumers.
Bertha Coombs now with more.
BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Walgreens says its $17 billion merger with Rite Aid (NYSE:RAD) will allow the company to control costs and offer more services to consumers.
Analyst Richard Evans says it’s more complicated than that.
RICHARD EVANS, SECTOR & SOVEREIGN RESEARCH: I don’t think the Walgreens deal is about getting better prices for the consumer at all. It’s a counterweight to drug benefit designs, which are beginning to restrict which pharmacies people can or cannot go to.
COOMBS: Insurers and large employers have looked to combat rising drug expenses and get ahead of new taxes by limiting pharmacy networks to get better contract discounts from drugstores. Getting bigger will help the pharmacies stay in those networks. Walgreens, already the biggest U.S. chain, would have more than 12,000 stores, if the deal’s approved. Its next largest rival, CVS (NYSE:CVS), which bought Target’s pharmacies, nearly 10,000.
One former Trade Commission regulator thinks that much concentration is going to limit consumer choices.
DAVID BALTO, FORMER FTC POLICY DIRECTOR: The FTC’s really concerned about increasing health care costs, and basically, turning the pharmacy market into a duopoly with one such dominant firm just will mean consumers pay more and receive worse service.
COOMBS: David Balto argues consolidation among the large insurers and pharmacies means consumers will just wind up paying more for health care.
BALTO: The story has been lackluster at best about whether consumers benefit in any fashion from some of these mega mergers. It’s hard to come up with any example in which consumers have benefited.
COOMBS: Analysts say consolidation is happening because health companies, the government, employers and other payers are all trying to find efficiencies to reign in health costs. Until the dust settles, consumers will likely be caught in the middle, facing rising, out-of-pocket expenses.
Bertha Coombs, NIGHTLY BUSINESS REPORT.
HERERA: Activist investor Carl Icahn takes a stake in AIG, and that is where we begin tonight’s “Market Focus.”
Icahn is pushing for change at the nation’s largest commercial insurer, saying it should spin off its life and mortgage insurance units into public companies. He also said the companies should cut costs. Shares of AIG rose nearly 5 percent to $63.91.
Hyatt Hotels (NYSE:H) is in talks to buy Starwood, according to CNBC. This comes after reports that at least three Chinese firms were looking to buy Starwood, which we told you about yesterday. Starwood rose more than 6 percent to $79.56. Hyatt Hotels (NYSE:H) fell nearly 2 percent to $49.63.
Diamond Foods (NASDAQ:DMND) is being bought by Snyder’s Lance (NASDAQ:LNCE) in a transaction worth more than $1 billion. The move is an effort by Snyder’s to expand its portfolio of better for you snacks. Shares of Diamond Foods (NASDAQ:DMND) surged nearly 9 percent to $38. Snyder’s Lance (NASDAQ:LNCE) fell almost 8 percent to $33.25.
And a chipmaker Texas Instruments (NYSE:TXN) is in talks to purchase Maxim Integrated Products (NASDAQ:MXIM), that’s according to Bloomberg. Maxim has reportedly also received interest from analog devices and may not sell unless it gets a high premium. Shares of Texas instruments rose 1 percent to $58.67. Maxim integrated was up 9.5 percent to $42.12.
MATHISEN: GlaxoSmithKline reported higher sales in its third quarter. Strong demand for HIV drugs and flu vaccines helped the drugmaker’s earnings and offset a sales decline of its respiratory medicines. Shares up 4 percent to $43.53.
Meanwhile, Occidental Petroleum (NYSE:OXY) reported earnings and revenue that beat. The company also announcing that it will exit its oil fields in the Balkan shale in North Dakota. Those operations are losing money. That sent shares 5 percent higher today to $73.81.
Northrop Grumman (NYSE:NOC) reporting earnings that came in well above forecasts today. The company’s revenue also topped the consensus and it increased full-year guidance. Shares 5.5 percent higher. They finished at $190.45.
HERERA: The House passed a budget deal that would increase spending caps for two years and suspend the debt ceiling through early 2017. It also adds $80 billion in discretionary spending. Now, that measure heads to the Senate for its consideration.
MATHISEN: And House Republicans nominated Paul Ryan as speaker of the House to replace John Boehner. He leaves Congress Friday. The vote took place behind closed doors in the caucus. Afterwards, Congressman Ryan said changes are coming.
(BEGIN VIDEO CLIP)
REP. PAUL RYAN (R), WISCONSIN: Tomorrow, we are turning the page. We are not going to have a House that looks like it’s looked the last few years. We are going to move forward. We are going to unify. Our party has lost its vision, and we’re going to replace it with a vision.
(END VIDEO CLIP)
MATHISEN: Ryan must now be elected in a full public vote of the full House, Democrats and Republicans. It is scheduled for tomorrow.
HERERA: And the House voted to reauthorize the Export/Import Bank late last night. The measure received broad bipartisan support with more than half of the House’s Republicans voting to renew the charter. Now, that measure heads to the Senate where it faces opposition from Majority Leader Mitch McConnell. The Export/Import Bank helps to finance companies’ overseas sales and it’s used by both small businesses and very large ones.
MATHISEN: Well, the race for the White House focuses on the economy tonight. The Republican presidential candidates meet for their third debate in Boulder, Colorado, hosted by CNBC, the producer of this broadcast.
And the topic tonight is one that everyone can relate to — your money. Eamon Javers takes us through the big themes of tonight’s big debate.
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: A lot of economic news to talk about in tonight’s GOP presidential debate on CNBC. One of the things we saw in Washington, D.C., today was a decision on interest rates by the Federal Reserve. You can imagine, that will be a topic of the questioning this evening of all of these Republican candidates, ten of them up on the stage this evening.
Also in Washington, we saw a budget deal coming together this week that a lot of conservative Republicans don’t like, and you’d imagine that some of these candidates are going to want to tee off on that insider establishment deal, very critical of the process, the conservatives have been. That’s an area where we think we’re going to see some deep questions going into the debate tonight.
Also, of course, some of the big, overall economic themes — job-creation in this country. We’ve seen a little bit of a slowdown. Where does that go? What are the candidates’ plans? Economic growth. How do you overall grow the size of the pie economically?
And then, of course, going into the economy in specific questions about sectors — technology, health care and other areas.
And then you look at number one and number two, Donald Trump, a business executive. You would think this would be home field advantage for him. Ben Carson, though, a retired neurosurgeon, maybe not as well versed in the economic subject that he’s going to see tonight.
For NIGHTLY BUSINESS REPORT, I’m Eamon Javers in Boulder, Colorado.
HERERA: Economic growth, regulation and health care are some of the issues that matter most to small business owners, and at a recent conference, many said they’re watching the race for the White House closely and they want to see more details on the candidates’ economic plans.
(BEGIN VIDEO CLIP)
DOUG PICATTI, VITALWARE: Probably the biggest issue for us would be regulations and taxation relative to small businesses. As we grow as an entrepreneur, it’s important for us to be able to grow and be able to work within a system that allows us to be successful.
JAMIE PRITSCHER, NUPHORIO: Health care’s always a big concern, how much you pay and how much, you know, employees want, and it’s going up and they’re going outside to get health care. And it’s hard to be a small business and not be able to provide all of that.
LISA HENDRICKSON, SPARK CITY: I do believe that minimum wage needs to go up, but also, the government is really lagging in that. I think the market has really been, you know, pushing and telling us that if we’re going to keep good employees, we must be able to pay. I’m not saying top dollar, because again, the market isn’t really back yet where we feel like we’re in a space that we’re comfortable to be able to say we can afford those raises.
(END VIDEO CLIP)
HERERA: And according to a recent survey of small business owners, nearly 70 percent rate the overall business climate as fair or poor.
MATHISEN: And coming up, what your kitchen says about you — mine says you mostly use me to reheat the takeout — and why figuring it out is big business for builders.
HERERA: Here’s a look at what to watch for tomorrow. The Commerce Department is out with its advanced third-quarter gross domestic product estimate. That’s the broadest measure of economic activity.
A report on the number of Americans who filed for unemployment benefits last week is out. And pending home sales are released as well. And that’s what to watch for on Thursday.
MATHISEN: And finally tonight, sales of newly built homes took a dive in September, as we told you last night, and builders say there’s just no great urgency on behalf of buyers, and that’s why one big name in the business is taking a new approach, designing the most important room in the house based on the buyer’s personality.
Diana Olick explains from outside Atlanta, in Norcross, Georgia.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In a nondescript warehouse just outside Atlanta —
UNIDENTIFIED FEMALE: Talk first about functionality.
OLICK: — homeowners are describing what they like in a kitchen and what they don’t.
UNIDENTIFIED MALE: I think it doesn’t have enough seating if you’re entertaining.
OLICK: It’s all part of a push by Pulte Homes, one of the nation’s largest public builders, to hone in on an increasingly picky and price-conscious consumer. Create the kitchen based on the buyer’s personality.
RICHARD DUGAS, CEO PULTE HOMES: Kitchens are the focal point of the home. Again and again, our buyers tell us, if you get one room right, get our kitchen right.
OLICK: So, Pulte invited suppliers like Whirlpool (NYSE:WHR), Electrolux, Collier and Moen to not just show their wares, but build kitchen models with those wares, so Pulte could in turn show those to focused groups.
DEAN KELLY, FOCUS GROUP MEMBER: I’m a functional guy. Everyone has to be in its right place. I’m a neat freak.
OLICK: It’s not about whether you’re a home chef or you cook to survive. It’s about lifestyle and life choices. Builders today need to cater not just to suburban families but to young millennials who wait longer to have children to downsizing baby boomers and to a more urban, social, higher end demand.
DUGAS: You’re talking price points of $400,000, $500,000 in many cities.
OLICK: By investing in research now, Pulte claims it will ultimately save money.
BILLY JO HILL, FOCUS GROUP MEMBER: If your kitchen was closed off and that’s the way you like it, you’re probably the person who doesn’t want to entertain, doesn’t want to be the life of the party.
OLICK: No more gambling on local designs. Instead, finding out who their buyers are and exactly what they want, and then building on that.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick outside Atlanta.
HERERA: And that’s NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera. Thanks for joining us.
MATHISEN: And thanks from me as well. I’m Tyler Mathisen. Have a great evening, everybody, and we’ll hope to see you right back here tomorrow night.
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