Closing Bell - Closing Bell: Stocks volatile on CPI print, Former Fed official Quarles reacts, Under-the-radar chip play 2/14/23

Episode Date: February 14, 2023

The major averages had a volatile session as Wall Street tried to make sense of a hotter-than-expected inflation report. Former Fed Vice Chairman for Supervision Randal Quarles discusses the print and how it could impact the Fed’s rate strategy. KeyCorp CEO Chris Gorman also talks inflation and gives his view on the state of the consumer and the lending market. The CEO of under-the-radar chips play Cadence Design Systems breaks down his company’s quarter and the outlook for the sector. Plus why Palantir saw a huge pop, Zoetis’s CEO on the avian flu, and why Bank of America thinks Nvidia could be a big winner in the AI wars.

Major averages all over the map today as Wall Street tries to make sense of that hotter than expected inflation print. This is a make or break hour for your money. Welcome everyone to Closing Bell. I'm Sarah Eisen. There's the Dow. Take a look at where we stand overall in the market. Down 80 on the Dow. The low of the day was down 418. But just to show you how the swings have gone, the high of the day was up 85. S&P 500 holds on to a gain just barely. It's consumer discretionary technology, materials and energy that are leading us higher. Those are all the green sectors. Everybody else is lower.

Real estate staples and financials at the bottom of the pack. The Nasdaq is holding up. It's up about half a percent. Thank you to NVIDIA, Tesla, Microsoft and AMD for the Nasdaq's rise. Rise because you have some of the other mega cap tech players lower like an Apple or an Amazon. Check out Palantir among the biggest winners today after reporting a surprise quarterly profit. CEO Alex Karp calling it a significant moment for the company. We'll talk much more about that move later on in the show. Also ahead this hour, former Federal Reserve

Vice Chair Randy Quarles joins us with his first read on today's inflation print and how it could inform the Fed's next rate decision. Plus, we'll talk to the CEO of Key Corp, which is outpacing its regional bank peers this year, his read on consumer lending and the mortgage environment. Let's get straight, though, to the market dashboard. Senior markets commentator Mike Santoli, what are you watching? Two-year yield, I just would point out, is higher on the back of that inflation print. And tech is holding up despite that. It's true. Short-term yields definitely have repriced a little bit higher, though the bulk of the yield move seemed to happen in the last couple of weeks before the CPI.

You're right. Tech also is performing fine. Those two are not perfectly linked. Of course, longer-term yields are a little bit tame. Indecisive action in the market today more or less on target CPI with some things perhaps to worry about about the stickiness of services inflation within the report. And it shows you that we more or less got what we expected except we're asking ourselves if in fact we need higher Fed rates a higher terminal rate. It's now getting priced in slowly, incrementally, the prospect for that, along with the Fed speak today. So it leaves us here really where we finished not last week, but the week before. Yesterday's rally in the S&P got back all of last week's decline almost to the point. And here we are pretty much holding most of it. But within

the day, as you mentioned, 1 percent moves three or four times from high to low around that flat line. Take a look at the market implied inflation expectations over the next five years. This is breakeven inflation over the next five years. Actually, this is a 10-year chart of the five-year forward inflation rate. And so, obviously, we were 2.5% 10 years ago, 2013, before we got used to the idea in the 2010s that it was hard to create inflation in that economy that was operating kind of below potential. Here we are, though, really a lot of relief. That's when the market more or less found its footing is when we got some downside momentum and inflation expectations here. But we bounce a little bit. Right. So kind of curling higher from the two

area to two and a half. This isn't to say that this is an accurate projection of what inflation is going to come in. But it shows you what the market's braced for, what it's willing to pay up for in terms of inflation protection now, Sarah. I'm just looking at, so consumer discretionary is the best performer right now, and that's because of Tesla. Tesla's up 6%, and the stock is up 100% off the 52-week lows. It's been a good comeback. And yet it was down yesterday when everything else was up. So it was essentially, it sort of has a mind of its own. I think it's headline surfing.

I think it is a little bit of after January surge and some of the riskier stocks is a little more retail excitement. And, you know, maybe some struggles among its competitors out there when it comes to Ford kind of having a half step back with its EV pickup. So I don't want to explain the price action in Tesla because it's never made sense, at least on a point to point basis. But for today, that's why consumer discretionary is doing well. But I would say the downside leadership today, for the most part, is in defensive areas. So it's yield, it's yield sensitive and defensive. So it's not a terrible message coming out of the market today. Right. It's staples and real estate at the bottom of the list. Utility is not having a great day either. Mike, thank you. We'll see you in the market zone. Mike

Santoli, let's talk more about that inflation print, which marked the seventh straight month of cooling prices, though the number did come in slightly above expectations. I spoke earlier on CNBC with Bank of America CEO Brian Moynihan about the report and his bank's economic forecast. Listen. Our team has a recession predicted. They've moved it out another quarter recently to start in the third quarter, fourth quarter, first quarter next year. They've lessened the impact. And I think people are sort of coalescing on this idea that maybe this thing is a not a soft landing, i.e. no recession, but maybe a more mild recession. And the delay is due to the strength of consumer and other things. But the Fed's going to have to

get inflation where they want it. And that means they're going to hold rates higher. And that's the conundrum that's going around the market. Joining us now for an exclusive interview, former Federal Reserve Vice Chair for Supervision, Randall Quarles. It's good to have you on the show. Welcome. Thank you. It's good to be here. It is a conundrum, right, Randy, for the Fed, which is inflation is starting to come down.

Fed Chair Powell has talked about disinflation. But as we saw from today's numbers, it's not happening very quickly. And there are still a lot of parts in there that are proving pretty sticky. So what does the Fed do? Well, I think the first thing you have to remember is that, you know, the Fed's policy acts with a lag. And that lag is at least six months. Historically, people have thought that that lag is going to be a year, even two years before a particular policy action flows through to the economy. Now, there's very good reason to believe that that traditional one-year, two-year lag estimate is going to be shorter in this cycle.

And I think that it will be shorter. But even if you assume six months, we will just barely be seeing the effect of the first 75 basis point interest rate increase in the economy now. And so the repeated 75 basis point interest rate increases over the late summer and fall will work their way through the economy over the next several months. And I think this is about exactly what we would have expected inflation to be doing now, a little bit higher, but about what we would have expected it to be doing given that lag and given the Fed's policy, if you thought the policy was working. So I certainly think that this is evidence that the Fed's policy is working about as well as one could expect. But it was not until the middle of the summer that we started getting the

really robust rate increases. And that will take a while to work their way through. So if you were still on the Fed, would you be in the camp saying one or two more 25 basis point hikes is enough and then we can pause and see what happens? So I certainly would be. I do think that when you look at the percentage increase in the cost of debt service of short-term debt, has occurred over the course of this period, even though in absolute numbers, the interest rates are at reasonable historical levels, it has been a very swinging percentage increase

in the cost of short-term debt. And I think that that will, as it works its way through the economy, be quite effective. So I would, you know, if I were still on the committee, I'd support another increase of 25 basis points, take it up to 5 percent and then pause and let, you know, let policy catch up to the economy and determine where you go from there. Oh, so just one more. So does that mean, I mean, you're really making the case for the lagged effect of the Fed tightening. Does that mean that you think this whole burst of enthusiasm

around the economy, that we might not even have a hard or soft landing, that that's not realistic, that we're definitely going to have a recession once the full effect of the rate hikes hit the economy? Well, I certainly think so. I agree with what Brian Moynihan said just now, the clip that you showed, which is I believe from the beginning of this tightening cycle that you'd have a short and shallow recession. I think that's consistent with the dynamics

of the economy that we're seeing currently. The Fed has almost never, maybe once in 80 years, completed a tightening cycle without triggering at least some recession. And so it would be perfectly reasonable to expect one here. And I do, but I expect it to be short and shallow. If you would just hang on for one second, we do have some news to get to from Washington. Randall Quarles, we'll come right back to you on the other side. But Kayla Tausche

has some news from the White House. Kayla and more bashing of buybacks. That's right, Sarah. President Biden has frequently taken aim at stock buybacks by corporations. But today, for the first time, he slammed the stock-based compensation for many executives that is at the heart of a lot of the issuance and the repurchasing of the stock, which is why a lot of companies have been doing this and their stock count or their share count, rather, has not been decreasing. Earlier today at a speech to the National Association of Counties. President Biden said that voting in support of a 1993 tax reform bill that essentially placed a cap on the deductibility of executive compensation at $1 million in cash for a certain level of executive.

He said that that's one of his biggest regrets during his time in the Senate. He said the road to hell is paved with good intentions. And he blamed that law in particular for leading to so much of an executive's compensation being in stock and therefore leading companies to be issuing and repurchasing so much of it. Remains to be seen whether this will be channeled into any policy actions by the White House or any calls on Congress to change some of those laws. But certainly, Sarah, it is the first time that President Biden has made that specific argument. I know many executives are taking notice. Back to you. Kayla Tausche. Kayla, thank you for the update from Washington. With us, Randall Quarles, the former vice chair of supervision for the Federal Reserve. Do you have any problem with stock banks' compensation for executives and share buybacks? Really, no.

I haven't ever heard a really coherent, let alone compelling, argument, certainly not against stock-based compensation, that aligns the executives with the shareholders. And if the compensation committee of a board wants to have a certain amount of compensation in stock, I see no public policy reason that we should be opposed to that. And in fact, stock buybacks, the practice of our large banks distributing, returning capital by repurchasing their stock, allowed us to be much more flexible during the COVID event in 2020, when regulatory authorities around the world had to completely prohibit banks from issuing any sort of dividends. And because our companies distribute a reasonable amount of capital through stock repurchases that are variable and not expected, we could close down those stock repurchases and still allow dividends to be repaid. So I see a number of positives to the practice.

Yeah, no, and I'm glad you added the context because I was going to tell people you are the bank cop. You are the bank cop on the beat, right, for the Federal Reserve. And that was what you were famous for. I actually in that conversation with Brian Moynihan today, we talked a little bit about the new stress test scenarios. And he was pretty adamant that, you know, banks are very well capitalized. The industry is well capitalized. We don't need more capital in the industry and that he's still doing buybacks. And I just wonder if you would agree.

Yeah, I don't think there's any argument there. The banks are extremely well capitalized and there is I think the amount of capital is just about right. I wouldn't argue for significant reductions in capital, but there is a cost to too much capital in pushing activity outside of the pretty stable banking system and into the less stable non-bank system where there are bigger risks to financial stability. So I think you have to think about the whole system when you think about what the right level of bank capital is and continuing to increase it has costs. Right. I think they would agree with you on that point. Randall Quarles, it's good to talk to you. Thank you very much. Thanks for bearing with us on the news as well. I'm weighing in. Thanks so much. Thank you. Former Fed governor and vice chair of supervision. After the break, the under the radar $50 billion tech company making a big move today on earnings. We're

going to talk to the CEO of Cadence Design Systems. Look at the stock up 7.2%. It counts names like Intel, NVIDIA and Broadcom as clients. We'll talk to him about the outlook for the chip sector, consumer tech and AI. Dow's down 100 points. NASDAQ remains positive by almost half a percent. You're watching Closing Bell on CNBC. Check out shares of Cadence Design. Shares are up better than 7% right now, touching an all-time high. The company reporting a strong fourth quarter while issuing first quarter and full year guidance that came in above analyst estimates. CEO of Cadence Design Systems, Anirudh Devgan is here. He joins me now for the first time.

It's good to have you. Great to be here, Sarah. So we don't talk a lot about your company. It's a huge tech company that services semiconductor companies whose stocks are all down in the last year and you're making new highs. How does that work? So Sarah, that's a good question. So Cadence makes software that designs chips and electronic systems.

And you know, chips are all around us, right? You know, whether it's the phone or the computer or even washing machine at home, they all have chips in them. And they are all different based on what the requirement is. So they all have to be designed so almost any chip in the world design is designed with some form of cadence software so we and there is a secular demand for more and more chips more and more electronics so that's why we are doing well and I'm really proud of the team and really thankful to our

customers and partners yeah so you're doing well secularly, despite the fact that a lot of those end markets you talk about PCs, electronics, post-COVID are really weakening those categories, aren't they? So at Cadence, you know, we work with all end markets. Some are strong, some are weaker, work in all geographies. Who's the strong categories right now? I mean, there are, you know, like data center is strong, automotive is strong with all the electrification. But the key thing to remember is that there might be some, you know, revenue fluctuation for some of our customers in the short term, with supply, you know, demand imbalance.

But in the mid to long term, there is still going to be massive demand for semiconductors. And you know, most of these R&D projects, they take like three years, five years to develop, and we are part of the R&D cycle. So the customers are still investing heavily in innovation, and that's why we work with them. That's why I was going to ask you if we should take the strong numbers, the double-digit growth that you're posting as a sign that despite the sort of uncertain macro environment, these big semiconductor companies are not pulling back dramatically on R&D spend. No, they continue to invest for the long run.

And there are three big drivers for our growth. So first is, you know, investment of semiconductors in long-term R&D because these products take a while to develop. The second very interesting trend is that a lot of the system companies, you know, the companies that make cars and phones, they're also doing their own chip design. So about 45% of our business now is from system companies. And that greatly increases our time, you know, it adds to our end market. And then third big trend is use of AI, you know, that's pervasive these days. And, you know, if you look at the chip right now, you know, in one inch by one inch, it can have 100 billion transistors.

That's a lot of transistors. You know, that's one of the most complicated things, you know, humans have ever developed. But if you look at 2030, that chip will have 1 trillion transistors, 10 times more. Why? Because of AI? Because of more integration. As we go through the process nodes, we can put more and more transistors, get better performance. So all these things have to be designed.

So the complexity of the chip will be 30, 40 times more because of AI, because of 5G, because of more cloud computing. And so for us also, there is opportunity to apply AI to improve the design process. A lot of the lower level mundane tasks can be done by AI and the customers can be more effective by using our software. Is your business affected by the CHIPS Act that was just passed? CHIPS Act is a good investment that the U.S. is doing. It talks about how essential this technology is. And we are seeing investment in all parts of the world. You know, whether it's in Asia,

Europe and US and we are on the design side of the value chain but it's good to see more and more investment by US. You know, more foundries being set up, more design work we've done. So we're working with all the leading companies to enable design in US or Asia or wherever it is done. I mean, do you work for companies in China? Aren't we sort of in a competitive battle with the Chinese chip makers where we don't want them to have the advanced semiconductor design that we have? Well, we work with, you know, we follow all the US regulations.

But in general, we work with wherever chips are designed. And China has a lot of chips being designed. There are a lot of companies there, just like they are in other parts of India, Europe, Israel, US. So we have a global footprint. And we enable innovation in all parts of the world. So you mentioned AI, which is obviously huge for investors right now. This is something that you said you have been... there's a use case for you for years already.

Explain where you are and where the semiconductor industry is as a whole on AI. Well, AI is going to be transformational, as you know. And I think we are just getting started with AI. And for us, we have more than 30 projects on AI. We have been working on it for more than five years. And the first product we released was like two years ago. And the real value is to do better designs and with more of the automation, lower level tasks being automated.

So in a lot of cases, we can get like 10 to 15% better performance through use of AI. And typically, you have to go from one process node to another process node and invest billions of dollars to get that performance. And with using better AI and better design software, we can get it by working on the design. So that's a huge value of our customers. And also, they can spend, there is an opportunity for us to do more automation. That's the history of Cadence.

For the customers to spend more on automation, and we can be deflationary. I think R&D spend will still grow. Headcount will still grow for our customers. But there is opportunity to replace that with more and more automation as the design complexity increases. Well, it's certainly one to keep an eye on. Anirudh, thank you very much for joining me today. I appreciate it. Yeah, with the stock hitting an all-time high, that's Cadence Design, big earnings winner. Let's show you what's happening with the overall market. We've got 36

minutes left of trading. Dow is lower. The S&P 500 up about a tenth of a percent. Strength in consumer discretionary technology and materials. It's offsetting some of the weakness in the defensive groups like real estate staples. Also, the financials are down about a third of one percent today. It's Tesla, Nvidia, speaking of semis, and Microsoft leading the charge higher. Let's talk Nvidia because it is a standout winner. Bank of America ups its target on the stock, saying it could win big, speaking of, in the AI arms race. We're going to talk to the analyst who made the call straight ahead on Closing Bell. Welcome back to Closing Bell.

Check out some of today's top search tickers on CNBC.com. Plenty of macro focus today. As always, following that CPI report, 6.4% inflation, 10-year yield right on top, 3.7. We're seeing higher yields across the curve. The two-year yield is on the list as well because there's a lot more action there. But that's the one that reflects the Federal Reserve's policy path. And it is higher today, 4.6%.

The S&P 500 is in there, up a tenth of 1%. As far as single stocks, you've got Palantir and Tesla drawing the most interest. Both are big winners. Palantir with a profitable quarter of 20%. Zoetis, also one of the big winners. Palantir with a profitable quarter of 20 percent. Zoetis, also one of the big winners in the S&P 500 today after the animal health companies beat on estimates. Up next, CEO Kristen Peck breaks down the numbers and discusses what is driving that demand. Closing bell back in a moment. 2022 turns out was a good year for Zoetis, the animal health company reporting an earnings beat this morning for its fourth quarter.

They also provided pretty positive outlook for the year, which is helping the stock today. Another earnings winner up almost 6 percent. Joining us now in a Closing Bell exclusive is Zoetis CEO Kristen Peck. Kristen, welcome back. Good to see you. It's great to be with you, Sarah. And it's really good to be joining you today from our U.S. National Sales Meeting in Denver, Colorado, where we are indeed celebrating a really strong 2022 and very excited for 2023. I was wondering, you're usually here at the Stock Exchange, so you're in Denver with the sales team. Fair. Absolutely.

Is it still pets, the companion animals that is driving this growth? Yeah, I mean, in 2022, our overall top line growth was 8%, and it was led by pets yet again, which had 14% growth. And really by our parasiticide franchise, by our dermatology franchise, and exciting new products, as you know, in OA pain with Lobrella and Silencia on the pet size as well. You did note, though, on the earnings call that vet clinic visits are down last year and that there's still challenges there on the labor front and staffing these clinics. Is that a sign that maybe this business would slow? Well, look, I think what's important to focus on is that the vet clinic visits are still ahead of where they were in 2019. They're still about 2%

ahead. It was a difficult copier in 2021 with all the new puppies who were adopted. Puppies have many, many visits. But we've also seen the labor challenges, as you've seen across many industries. It's certainly hit the vet space hard. But really what we're expecting as we move into 2023 and what we spoke about this morning on the call is that we're expecting that to flatten out in 2023. And we're even starting to see some positive signs of potential growth there. As you look, you know, over the last, say, 10 years, on average, you see about 1% growth. But really, our business is driven mostly by spend per visit, which seems is very strong, was up in Q4 around 10%. So those trends still remain very strong in the pet industry and for Zoetis. So fewer visits, but people still spending more. How sensitive,

Kristen, is it to the overall economy? If we do see a pullback in consumer spending, what typically happens to animal health for pets? Well, the animal health industry over time has been incredibly durable and resilient. If you even go back to 2008, 2009, we still grew through it. On average, the industry grows at around 5 to 6 percent. And Zoetis, on average, has been growing around 8 percent, so significantly above that. And we've been polling customers, both the Human Animal Bond Research Institute and 86 percent of pet owners say, quote, they would spend whatever it takes to take care of their pet. And importantly, we recently asked in a survey in Q4, if there was a 20 percent reduction in household income, you know, would pet owners still be

willing to pay to take care of their pets? And the resounding answer was absolutely yes. Right. Sort of a staple on that front. So on the livestock front, avian flu, are you affected by this? And why do we not have a vaccine? It's clearly extremely destructive for our food supply chain. Yeah, I mean, I think you've seen big impacts overall with our customers and certainly for the consumers as you look at the price of eggs. It doesn't have a big impact on zoetis just given the size of our poultry business. And this is really affecting the long-lived birds.

So the birds that lay eggs, you know, and also turkeys as well. And in there, it's really had a 14 percent, you know, they've had to eradicate about 14 percent of those birds. So it's a real struggle for our customers, certainly for pet owners. We are partnered with the USDA and, you know, with regulatory authorities across the world because this is not just a U.S. problem here. And we stand to the ready for a vaccine. But I think the reason why you're seeing most governments choose not to is it would shut down the export market, which could have an even worse effect overall on pricing. So once you vaccinate a bird, it's hard to tell if the bird actually had it or was vaccinated for it. So most countries will not let that product be brought into their markets.

OK, so there's the answer on that. Kristen, you also do business in China, and I'm curious what you're seeing since they have reopened. It feels like it's been a slow and steady reopening. You've got a good sense. What do you see? Yeah, as you look back in 2022, we saw about 11 percent growth. And what we're seeing on the ground there is, you know, real excitement for the reopening. We're seeing very positive signs right now, certainly in the pet care space. But what we're really watching for is will they see the return to tourism and dining out, which will not just have an impact on China, but the rest of the world.

China still imports a tremendous amount of their protein across pork, poultry, beef, dairy, you name it. So if China starts, you know, really growing quite quickly, we're going to see really strong growth in other markets for us around the world, including Brazil, the U.S. and Europe. So so far, so good. But I really think it's quite, you know, too early to tell on the way that's going to ultimately play out and we'll remain cautious. But I really think it's quite too early to tell on the way that's going to ultimately play out. And we'll remain cautious. But we are optimistic at this point. I saw fish was an was an interesting bright spot for you in the livestock category. I did. I didn't realize that salmon get vaccinated. Is that a thing? Oh, yeah. You know, we had about 22 percent growth overall in 2022.

And they do. Indeed, we are the world leader in vaccinating salmon. It's a business primarily in only a indeed. We are the world leader in vaccinating salmon. It's a business primarily in only a few geographies around the world. So obviously in Norway and Chile. And yes, they are indeed vaccinated. Who knew? I always learn from your earnings reports. Kristen, thank you very much. Appreciate it. Absolutely. Great to be here. Thanks so much, Sarah. Kristen Peck of Zoetis. Coming up, the CEO of Key Corp weighs in on the latest reading on inflation and whether he's seeing any changes in consumer loan demand. Coming up, the CEO of Key Corp weighs in on the latest reading on inflation and whether he's seeing any changes in consumer loan demand. Also, check out shares of Boeing as we head to

break. Leading the Dow today after Air India announces a huge order for more than 200 aircraft valued at $34 billion. Boeing stock up almost 2%. We'll be right back. We are now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santoli here to break down these crucial moments of the trading day. Plus, we've got Frank Holland here on Palantir's Big Pop and Bank of America's Vivek Arya with a new call out on NVIDIA. We'll start with the broad market, Mike. Down 79 on the Dow. The S&P is up two tenths. So we've kind of built on

some gains in this final hour. Resilient is what I would call this market in the face of, you know, you could craft a narrative that says yields are a little bit higher. There are more Fed officials out talking about higher rates than we even expected. If the data comes in strong, the inflation numbers cooled a bit, but not really in certain categories like apparel and pharmaceuticals and tobacco and rents aren't down that much. And the market's hanging in there. Yeah, you can imagine a 2022 type market that would not have had as much of a calm reaction to today's numbers and Fed speak. This is the second CPI day in a row, though, last month as well. Very muted equity market reaction. Last time, I think we were up three tenths of one percent. Now,

the numbers are coming in pretty close to forecast. It's moving more slowly. So there's a slow grind lower in the annual rate of inflation. It seems like economists kind of have a fix on what the various subfactors are that are driving things. So maybe that's why the market is not too alarmed. You would assume there's a certain yield level that would not be comfortable enough for the market. But for now, like semiconductors breaking higher. You have a lot of the cyclical groups that have sort of bought themselves the benefit of the doubt with this rally, with the breadth of the rally we've had so far this year. So even though we're not really making any much upside in the last eight or 10 days, we are holding most of the year-to-date rally. Absolutely. Let's talk about that high inflation. It's still squeezing the consumer. The consumer price index rising 6.4 percent in January compared

to a year earlier, with shelter and food costs making up the bulk of the increase. But the consumer proving resilient, according to Bank of America CEO Brian Moynihan. Here's what he told me earlier. Consumers are in pretty good shape. They have money in accounts. They have a capacity to borrow. They have, they're employed, you know, three and a half percent unemployment rate plus or minus. The wage growth is still relatively strong. Inflation is tough on people who are, the rate of goods is exceeding their wage growth. And that should come back in line as they choke it down. But overall, the consumer is in very good shape. Key Corp also reporting strength in its consumer business in its recent quarter.

Its president and CEO, Chris Gorman, joins me from that same conference, the Bank of America Financial Services Conference. It's good to see you, Chris. Welcome. Great to see you again. So how do you read today's inflation number as far as what it means for the Federal Reserve's policy path? Well, I think the inflation number was basically sort of as predicted. I mean, it's on a path. My personal view is I think rates will be higher for longer. And I think probably the move from 8-1 to, you know, to 4 was, you know, took a while. I think the move from 4 to 2 is going to take longer.

On inflation. So you think the Fed's going to have to be in the game longer. What about the consumer? Can it hold up? Do you agree with what you heard from Brian as far as what you're seeing out there? Yeah, the consumer is holding up well. In our book, the consumer today has 50 percent more cash in their account than they did pre-pandemic. So the consumer, I think, has, you know, they're durable. I think there's certainly plenty of opportunity for for jobs and people that have jobs continue to get raises. So I think the consumer is pretty healthy. What we're seeing is the consumer is spending more, and spending more particularly around activities like leisure, for example. The spend is up about 8 percent this year for us, for our consumers in that area.

So what do you forecast? Are you expecting that that will at some point cool down because of all the tightening and that we'll go into recession? I do think we will go into recession. I don't know. I don't think it will be a particularly deep recession. But the reason I believe that rates will stay higher for longer is I think it's going to take some time for the consumer to really burn through the excess cash that they have. And I just think it's I think it's going to be, you know, a long but stable road. Some of the investors around your sector have been worried about deposit outflows, which were down last quarter. And you said at the conference that you don't think that the Fed balance sheet, which they are trimming actively, gets enough attention with respect to how it impacts your business.

Explain that. Sure. So the Fed's balance sheet today is some number like $8.4 trillion. And they're trimming their balance sheet through quantitative tightening about $95 billion a month. And those dollars will probably flow out of the banking system. So it's two impacts. One, it drains deposits out of the banking system. And two, it has the impact of increasing rates, depending on the math, maybe 25 to 50 basis points. So the shrinking of the Fed's balance sheet is a significant factor, both in terms of the absolute level of deposits and also in terms of the rate impact. Right. And a headwind, I would think. So

you've been building up loan loss reserves like some of the other banks, what does the credit picture look like right now and through the rest of the year? So the credit picture looks good. The reason we built reserves is as you look at under Cecil, there's really three things that drive a reserve build. And the first is the macro outlook. And there's just no doubt that from the third quarter to the fourth quarter, there was a deterioration in the macro outlook. And that really is what drove us to build our reserves. The other two factors are loan growth, and we are enjoying some loan growth. And then lastly, it's sort of idiosyncratic factors, which we are not seeing in our loan book at this time. Got it.

Chris, we appreciate you joining us. It's good to get the color from the Bank of America Financial Services Conference. That's Chris Gorman, CEO of KeyCorp. Look at Palantir shares. They are soaring after the data analytics company reported an earnings beat and its first ever quarterly profit. The company also expects to post its first annual profit this year. During its earnings webcast, CEO Alex Karp said all the recent buzz around AI is generating a lot of customer interest and discussed why Palantir has a pretty big advantage over rivals. Listen. The technologies we built that will allow you to do AI in private networks, institutions and enterprises have precursor technologies that

will take other companies four or five years to build. For example, how do you do AI in a regulated context? Let's bring in Frank Holland. Music to investors' ears right now when it comes to demand for AI products and also profitability. Those are right on point with where investors are right now. Yeah, the profitability, also music to Alex Karp's ears. I spoke to him before the earnings release. He was very clear. He was really proud that the company reached profitability about three years before they previously guided. He was also talking a lot about the company's AI capabilities, specifically when it comes to their real world experience for functions outside of search and for cloud computing. He was highlighting health care manufacturing as regulated industries, which you heard him reference at the end of that soundbite, where Palantir is putting its software and its AI to work currently today.

The company has also said it has a number of functions when it comes to supply chain management. Of course, Palantir is known for its work with the government, often seen as kind of a black box because a lot of that work is secret or sometimes classified. But it does use its data and analytics with the U.S. government currently. And however, Karp said the secular buzz around AI has been a big tailwind that led to this beat when it came to EPS and turning a profit. He was also very excited about the possibility of this company growing its commercial user base. That's customers outside of the government sector saying more and more companies are not only seeing the utility of their software, but they're just getting more interested in ways that can improve their business. He again saw it as a big tailwind. And on top of that, we also talked about inflation and rising rates. He says he

doesn't see that being a big issue for Palantir because they have very little debt and they have about two point six billion in cash in reserve. The question, Mike Santoli, is whether they can they can really turn the trend here when it comes to the stock. This was a stock that went public. There were so there were such high hopes for it. It got up to what? Forty five, forty six dollars. It's now trading nine twenty five, even with the big surge today. It looks like a lot of those stocks that really did kind of catch up in the jet stream into early twenty twenty one. The first day of trading for this stock after its direct listing, it closed right here. Nine fifty. As you say, it went up into the 40s, bottoms at six, up 50 percent. A lot of stocks look like this. They now have somewhat more earthbound revenue multiples, price to sales multiples and things like that. Sure,

it's turning toward profitability. But I do think now you have this extra push with the AI excitement, which may or may not be kind of something that gets it valued in a rational way. It might just sort of have another one of these melt-up type moves, and we'll see if the fundamentals down the road can sustain. Yeah, it's still down 30 percent in the last 12 months. Thank you, Frank Holland. Speaking of AI, NVIDIA is also moving on AI headlines today. That company could be a second derivative winner of the AI arms race.

That's according to a new note from Bank of America's Vivek Arya, saying data center sales could quadruple in the next five years. Vivek joins us now. He also raised his price target on NVIDIA to $255 from $215. Vivek, so do you think this is an underappreciated story for NVIDIA? Yeah, thank you, Sarah. I think two points to make. First is that we are in very early stages of this generative or conversational AI technology. And like any new technology,

you know, it goes through its hype cycle, but we think over time, it can be very profoundly disruptive, you know, very much like the early days of the internet. And the way to get exposure is through the picks and shovels companies, because you just don't know which specific cloud or enterprise application model is going to be best able to monetize it. So you invest in companies

that are really very well positioned from a picks and shovels perspective, which is NVIDIA. The second thing, let's assume, you know, generative AI is going through a hype cycle, and it never gets big. What is still very important is that we look at the mountains of data that is being created, and a lot of this data is voice, video, images. The way to process this, the way to get insights from this, is really through accelerated computing. And that's a new form of computing where you need the full-stack approach that NVIDIA brings to the table. So we think with or without generative AI, the company is extremely well positioned. Are they better positioned than their competitors? We were just talking about

Cadence. We were talking to Cadence CEO about where this is all going. So how far ahead is NVIDIA than, say, an AMD or an Intel or another big micron chip maker? Absolutely. So we think Cadence and Synopsys are actually suppliers into NVIDIA. They help NVIDIA design those chips. So we think they're also going to benefit from this trend. But when it comes to within the broader semiconductor industry, I think it's very hard to come close to where NVIDIA is because this is not a chip game. You know, this is not a chip game. You know, this is not just making a chip and throwing it at the customer. You have to take that chip.

You have to turn it into a system. You have to add software. You have to have developers around it. And then you have to do all those things at scale. And that is something where I think NVIDIA is very uniquely positioned. But, you know, as the market grows, it is going to create more opportunity for the likes of AMD, Marvell, Broadcom and others. But when it comes to the 60, 70 percent market share, I think it's very hard to beat Nvidia at that. I guess the counter argument would be the fact that this is a stock that's already up almost 60 percent year to date.

It's like barely even February already. It's had quite a run off the lows. So it's an interesting time to be raising your target. No, that's a fair point, Sarah. And next week, the company reports, and we have previewed before that there is a potential for some slow down in cloud CapEx very early in the year. There's also the timing of when their new Hopper H100 product starts ramping. So there could be some volatility near term. But as we look past earnings, you know, in March, they are going to have their GTC conference. But I think we will learn a lot more about the use cases that their products are getting involved in. So I would

suggest that the call that we are making is a medium to longer term call. But next week, there is the chance for some volatility in the stock as the report earnings. All right. Thank you very much for clarifying. Makes sense. Vivek, thank you. Appreciate it for joining us. Vivek Arya, Bank of America. We've got two minutes to go here in the trading day. Mike, what are you seeing in the market internals? Looks like the Nasdaq remains pretty strong. Yeah, Nasdaq is the strong spot. Really very mixed internally, although it has improved over the course of the day. And the New York Stock Exchange, it was pretty 50-50 up-down volume earlier. Now it is pretty decidedly positive. So there has been a little bit of traction built since we did hit the lows of the morning. Take a look at the

six-month Treasury bill yield. This caught some eyes today. Now got above 5% after today's CPI and with all the Fed speak. So that six month period from here on out is going to catch, you know, two, perhaps three rate hikes. That's one of the highest points, if not the highest point on the Treasury curve, along with the one year at this point. Volatility index did give back a point or so of premium. We got the got past the CPI shows you that that's really all it was waiting for there to give way again. We're scraping pretty close to the lows for this cycle, Sarah. Right. So the news of the day is CPI. We got January read on inflation, 6.4 percent, seventh month in a row of cooling. But it did come in a little bit hotter than expected. If you go beneath the headline,

there are some categories which showed a jump in prices from last month. But overall, taken by the market pretty well. There's the Dow down 160 or so at the at the close here. The S&P 500 is unchanged. That's because you have strength in groups like consumer discretionary. Tesla's in there. It's jumping today. Technology, though, information technology is good. The semiconductors are rallying. Materials, communication services, those are the sectors that are going to close higher. Everybody else is lower. Real estate and consumer staples at the bottom of the pack.

The Nasdaq composite closing up about half a percent, making a gain of so far 2% to start the stronger week after a pullback last week. That's it for me. I'm closing now.