Power Lunch - Powell Speaks Out, and Microsoft CEO Live 2/7/23

Episode Date: February 7, 2023

There are 2 big events driving markets today. First, we had Fed Chair Jerome Powell speak on the economy, saying the “disinflationary process” has begun. We’ll break down his comments, and the big U-turn for stocks. Second, Microsoft is holding a big event focused on A.I. CEO Satya Nadella says it’s going to reshape everything in the software space. He’ll join us live to discuss that and everything about the “A.I. Revolution.” Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch, everybody. I'm Tyler Matheson, alongside Kelly Evans, two big events to talk about today. First, we just heard from Fed Chair J. Powell. He says deflationary progress has begun. The market's liking the sound of that, at least the first. We'll break down his comments and the big market future. And in the meantime, Microsoft holding their big event focused on AI. CEO Saty Nadella says it's going to reshape everything in the software space. It's already reshaping search for them. He joins us in just a few minutes. minutes to talk about this revolution. And we have a great panel assembled to talk about both of these big events today, our own Steve Kobach, along with Oppenheimer analyst Tim Horan, Kate Rudy,

Herb Greenberg, and Jennifer Elias will be joining us to talk about Microsoft. And on the Fed and the markets, we will hear from Bill Lee and Stephen to Niccolo. But before we get to them, let's get to our own Dom Choo to see how the markets are reacting post-power. So a roller coaster. That's pretty much what it's been, guys. We've seen both sides of unchecked. change so far for the broader S&P 500. We got as low as down 16 points, only to hit highs up 51, as you can see there, during FedChair Jay Powell's session at the Economic Club of Washington. And now we're back lower again on this session. So that trading range has been pretty severe. Now, on the corporate front, one of the upside standouts today is DuPont.

This is the specialty materials and solutions company behind everything from Tyvec building construction wrap to Kevlar Body Armor. It reports better than expected profits and revenues, helped along by their ability to charge higher prices for its goods. It did mention that it sees weakness in consumer electronics for the first half of the year before a rebound later on. Those shares up 5.5%. And we'll end with a check on the move in those artificial intelligence, AI and machine learning-related stocks, as you can see there.

Microsoft, Alphabet, both up big for Mega Cap Tech, bydew on the Chinese tech front after unveiling its own chat bot AI-driven. And then C3 AI is now down about 12%. But it's been a monster move for that stock. the last couple of weeks here. So watch those. And then by the way, one of the ETFs that tracks a lot of these names, the ARKQ, down about 1% right now. But again, over the near term, it's been a big momentum upside stock, guys. I'll send things back over to you. All right, Dom, thank you very much. Let's turn back to the Fed. Talk to a couple of key guests here, one of whom says the recent data

lowers the probability of both a recession and an early Fed rate cut. And there's no reason for Powell to comment on future rate projections right now. Now, Bill Lee is chief economist at the Milken Institute, and Stephen DeNiclo is portfolio manager at Federated Ermeys. Welcome to both of you. Bill, let me start with you. Did you hear anything out of the interview between Mr. Rubinstein and Chair Powell that surprised you in any way? I thought the first question was an interesting one. If you'd known what the jobs report said on Wednesday, would you have done the same thing?

What I really liked about Chair Powell's answer is that he really clarified something that the markets really didn't believe, which is that the Chair Powell has a dovish tilt toward data. I mean, the Fed has always said we're data dependent, but Mark's always assuming that he's going to chicken out. When the unemployment rate starts to go bad, it's going to start to get these guys to pivot and lower their rates. And I think he made it very clear that we are going to be even-handed. I think one of the things that the Fed has really failed to do over time has been to explain how it is that they make decisions and how they are. approach the data as they receive it. How do they interpret the data? And not having a reference point is something that's really hurt the Fed.

And I think today's speech has really made it very clear that the Fed is even-handed. They're not going to have a doveish bias and they're not going to have a hawkish bias. Stephen, he did seem to say that what the jobs report showed was a confirmation of what the Fed did. In other words, that the jobs report was strong enough to keep doing what they're doing, keep moving interest rates higher. He was hesitant. He bobbed and weave like Muhammad Ali on the question of, do you have an unemployment rate in mind in the same way that you have a fixed number in mind

for what inflation should be? Right. Look, I thought it was a great interview, and it was interesting to watch the market spike as he was talking, and people were laughing in the audience. And I think it was nervous laughter, and maybe people thought he was saying something new or something more dovish. But in reality, it was the same thing.

I mean, look, looking over at the overall macro right now, the landscape is clearly muddied and fluid surrounding the Fed's next move. And more importantly, the next step change at EPS growth up or down. Powell was saying today, deflation has begun, but it will be bumpy and rates will remain high. Everything is just getting started. He also said, which I thought was important, he said he's not looking to, to surprise people. So I think the base case is let's take Powell's word for it right now and invest from there. The one thing, Tyler, is that supply-driven inflation, I think, will be stickier than

people expect. And we're already seeing operating margins contract in many companies. But it used to be that the cure for high prices was high prices and new supply would come pouring in. But that's just not the case anymore. And Powell said we expect deflation in housing. And obviously you're starting to see that, but let's take a look. I look at companies for a living. Let's take a look at a company like Eagle Materials, the tickers EXP. They make cement and wallboard, very cyclical, very commodity-driven materials. There is no such thing as a new wallboard facility in the U.S. today. There is no such thing as a new cement plant today. And so you're not going to see the supply-driven move here, and it's going to have to come from demand and lower demand. And I think

that's what Powell is waiting for. Bill, do you agree with that? And how does this boil down for stock investors? Do you think they're heading into a bare market trap, so to speak, or is this the start of a rally that can be sustainable? The stickiest part of the inflation that the Fed is worried about and investors should worry about is the service sector X housing. And Chair Powell has made it very clear.

Yes, demand is very strong because people really want to buy these services. And as Steve just said, we don't have the supply coming up because we don't have the labor coming into these sectors to give us the extra supply. Look at the lines outside of restaurants that you see in New York and all the major cities and the lines lining up for airplane tickets where there aren't enough pilots. So the supply side will be very sticky. But I think Chair Powell has made it very clear. We're going to stay tight until we see the service sector inflation start to come back down

again because that's the one we're most afraid of taking off and kicking off a wage price spiral of the 1980s and 70s style that we had such a hard time. getting rid of. And so for investors, we should expect the Fed to stay tight and then perhaps even go beyond five, five and a half percent if those core prices remain recalcitrant. Yeah. So much to ponder, so much to digest, a dromedary. That's what Santoli told me that one hump. Is a dromedary a camel? Camel, yeah. Okay. Yeah, yeah. Yeah, that's what that's what the doubt, the intraday markets chart is a dromedary today. Gentlemen, thank you. Bill Lee and Stephen DeNiclo. All right, now we shift to another key story happening this hour, Microsoft, the company holding an event discussing OpenAI's ChatGPT and how Microsoft will use it in its products, both enterprise and for consumers, just minutes away from a first on CNBC interview with CEO Satcha and Adela.

Here to discuss are our tech reporter Steve Kovac, along with Timothy Horan, tech analyst and managing director with Oppenheimer. Steve, let me begin with you. what is Microsoft doing with chat API, GTPT, and AI and Bing? You'll be forgiven. Just forget about chat GPT, because that's actually... I would call it chat UPS, I guarantee. Let's just talk about Bing.

That's easier to remember, and that's the news today. This technology is being incorporated into Bing, meaning you can ask more complex questions to Bing and get a simple answer. I'll use the same example. They use Microsoft that I gave to you earlier, Kelly, which is the one data point they gave was, imagine you have a love seat and you want to fit it in your car, you can just ask Bing if it fits.

And it will take those resources from across the Internet and give you the one answer. That's one simple answer. Now, this is launching to, if you want to give it a try, Tyler. In fact, probably your computer. They just told me it's launching in a very limited preview way. So if you go to Bing.com, it might actually.

Is it bad that I'm using the Chrome browser? I think it's going to. I won't tell Satya Nadella when he comes on in a few minutes that you're going to use that. But anyway, the idea here is, And this is what Google said they want to do as well, Tyler, is superpowered their search by incorporating these large language models, these ideas that it can take different websites and coalesate altogether and different information sources and give you that one answer your need in a very complicated way, almost like you're talking to a human. That's the news today. All right. Let's move to Timothy. And I want to ask you two questions, I guess.

One is Microsoft will not be the only player in this area, will it? Google hasn't going to sit down and seed this area to Microsoft. And then the other thing is place this chat, GPT and AI in the broader context of what's next in the world of computing. I see you say this is going to be as important as the Internet. Last time I heard that, it was that the blockchain was going to be as important as the Internet. internet. Talk to me a little bit about those ideas. Great questions. Well, you need, first off, you need a hyperscale massive cloud infrastructure to do AI. And there's really only three companies that have that Google, Microsoft, Azure, and AWS. It takes massive amounts of bandwidth,

massive amounts of compute. And this is only going to accelerate at this point. And great question on how important AI is going to be. I mean, it remains to be seen, but we think it's going to basically be embedded in every single application, every single technology, and it will be extremely transformative. So does that quell your doubts? Well, yeah, I know. I think that's kind of what I expected Timothy to say was that it's going to be everywhere. It is ubiquitous. It is going to be something that you're not even going to be conscious of. Right. It's under the hood, Tyler. And to the cloud point right there also, Google on their announcement yesterday, we already knew this was a complicated and expensive thing to run in the cloud servers.

Google, without getting too technical, has figured out a way to do that cheaper. And so that's kind of what they're highlighting here, too. Whereas we heard from Sam Altman, who's behind OpenAI and chat GPT, say, you know, every time you put in a query, it costs us like three or four cents. Right. Google is claiming, well, we can do that for much cheaper and a much more efficient cost, therefore making it more enticing for people to get into that. I'm still trying to wrap my head around the love seat and whether it's going to fit in my car.

I typed it into BIO. I did. I typed it into BIO. Bing in Chrome, and I just got kind of generic, nothing to this. You might, it might not be activated. Yeah. And they said it's coming today. I did try an edge just to make sure that that wasn't the special sauce. You're the only person in this building using Edge.

I can guarantee you that. I'm looking at it. I don't think, I don't think this is yet widely deployed. But of course, we're all eager to check it out. We've, as I've said, I've used ChatGPT. Once you use it, you have it make a poem for you, you'll never be the same. If they all have the same, you know, so again, if Microsoft can make being useful in that sense, If Google has technology that's as good, fine.

But let's see. And not just as good, Kelly. The foundational technology of what's called a transformer. I told you this last hour was developed by Google. In an open source way, what open AI did was take that technology, expand on it, sell it to Microsoft, get that investment from Microsoft. And now it's being embedded into these Microsoft products, whereas Google's taking everything that's homegrown and just doing it themselves. That's why they were able to turn around at a dime and push out their product. Timothy, is the money that will be made from integrating AI into all kinds of functions,

mostly going to be made at the enterprise level or at the consumer level? And as you mentioned, there are really only three companies, in your view, Amazon, Google, and Microsoft, that have the enterprise scale. Well, like everything we've seen in compute the last 20 to 30 years in communications, the armed suppliers, the people that have the infrastructure, generally do extremely well. This is going to be a very organic process. We're not going to really be clear

what the new killer applications are going to be for quite a long time. But I think very, very early Microsoft is going to integrate all their products and services that try to create a digital assistant through teams, but also linking in and with LinkedIn, linking in it with dynamics, all of office suite. But you're also going to see them go out

to every enterprise in the world and say, let's look at your data and figure out how we can monetize this data. Now, that will all be done on Azure initially, But enterprises will be able to gain a lot of insights from that and hopefully reduce their expenses, maybe drive some new revenues. But not really, really clear what the new killer apps are going to be. It's very similar to where we were almost 20 years ago before Facebook and Google really took off. We knew the internet was huge.

We knew there was going to be a lot of great applications. But we didn't really know exactly what the new consumer killer applications would be. Yeah, it is ironic that the whole landscape right now feels like fool me once. Shame on you. Fool me twice. You know, we all went through the crypto couple of years. now here comes. Metaverse.

Are we forgetting Metaverse? The Metaverse. Two years ago, that's all we could talk about was the Metaverse and the promise of the Metaverse and Web 3. Or people have also said, you know, self-driving cars. You know, there's been a lot of promises. But this we can actually see. I agree with you.

We can actually see it. We can actually use it. We can understand the benefit of it. Metaverse? I don't know. Ugly avatars. I guess that's what we can see. Well, you know who's a perfect voice to add to this conversation right now.

Herb Greenberg. Let's bring him in. He is the editor, Empire Financial Research. Kate Rooney is here as well to talk about. this craze for everything AI, Kate. But Herb, let's start with you. We were just starting to get into this the other day, and now here we are with this Google announcement,

and now Microsoft, and are you sort of like hating all this from an investment point of view? Or could this be, again, the beginning of kind of Internet 3.0 or whatever we're calling it at this point? Oh, my gosh. I think we have the first or second batter up in the first inning. I think that long term, as everybody has said, is this is going to be in everything we do.

And as we all know, and as we've all been talking about, it's going to create tremendous hype and tremendous crazy bubble-esque type things possibly. But I think through that, there's going to be some great investments. And I think, you know, I've spent a decent amount of time looking at this, spending time on it. And honestly, I think if there was a single company, a single company right now, I still think Microsoft is the best position of all of them. not that Google isn't or that others won't be, but I think from the bigger perspective, I think, as Joe had mentioned, I actually think Microsoft, because you think you've been there, go back to 2016, you go back to their transcripts and their filings. They've been talking about this long time. And now it's coming to fruition only in its infancy, because now everybody's just talking about it. That's going to all die away. We're all going to sort of, you know, it's going to go on. It's going to start to infiltrate, and then we'll start seeing waves. And I think, you know, we'll get into some real. serious investments and some real potential. Kate, are there companies that you know of in Silicon Valley or elsewhere that are below the radar screen that are playing in this space in ways that we ought to know about? Oh, it's interesting. Taylor, so, oh, forget. No, Kate, I was asking. I'm sorry.

Thank you. Well, it's interesting on the private market side. I have heard anecdotally from a lot of venture capital investors that have said, you know, crypto and blockchain startups and some of the other tech companies have sort of slowed down at this point. You've seen what's happened with valuations. There is sort of a freeze on funding. They did say that the pitch decks that they're seeing, the founders that they're meeting, are desperate to put AI really on anything and just throw it into a pitch deck and say, oh, did we say we were building a financial app? We're actually also using AI. So it's becoming a little bit of a marketing ploy in the same way that we talked about with these publicly traded names, anything with .aI, as Dom outlined at the top of the show,

is doing tremendously well. It's getting this sort of investor bid. They have raised a lot of money, and now you see venture capitalists getting the same sort of fomo effect that it's just human nature and investing, and it's translating to private markets. So there is a little bit more of a lag in private markets. We will likely see that play out in the next couple of years. You don't have the real-time effect of the stock prices because these funding rounds take longer to do. But it is absolutely having an effect here. And the takeaway from some of these private venture capital investors is that AI in the same buzzy way, the blockchain got a lot of attention is having the same effect here. We'll see how it plays out, maybe too soon to tell. But as you guys talked

about, and Steve outlined, it really is tangible. I loved Kelly's example. I think it was a limerick that you did with chat GPT, but it's fun. You can use it. You can really wrap your head around it, whereas some of these other technologies are a little more enigmatic and hard to even picture behind the scenes. It's really only a trading platform. So blockchain is still yet to find, seems like that killer app, as they call it. One question on this, and this goes back to something you know very, very well, and it's about moats. You know, where are the moats? Do we know yet for people who want to invest in this, if this is, you know, the first or second inning of what could be a hugely lucrative thing?

Where are the moats? How can we be sure that they exist? Do you go with kind of niched companies? is all going to be commoditized and tucked into, you know, prevailing cloud offerings and that kind of thing? I mean, I come back to the lights of Microsoft and Google from the perspective of those creating it. If you're looking at the picks and shovels and everybody's going to be looking for the different plays. But I don't think you can say specifically, you know, who those players will be. So that's why I come back to if you want the longer term, and we're not talking about now.

I mean, it's like if you want to look at down the road, you know, you're talking two to five years out, that's when these are going to be, these should be core if you want. AI, you want a portfolio with AI, these should be core holdings. And I think that's one way to look at it. And then you know that's going to drive the business going forward. And by the way, what I'm looking for right now is an app that I can use. And I think Tyler will appreciate this, an app that I could use that will actually scrape chat GPT and Bard and all the rest of them. So we can be assured of getting the very best answer without human intervention. You want like a chat bot for all the chat bots? Of course.

That sounds dangerous. Yeah, exactly. Well, we'll get Empire working on that, Herba. Timothy, are there, let me ask you a sort of variation on the question I asked, Kate. Are there companies that you've got your eye on in this area,

beyond those big, the big three that we've mentioned, that are potential winners or are investable at this point by retail investors? Well, I don't follow it formally, but All these models are trained on Navidius chips, GPU chips. They have a whole bunch of features on them that make it ideal for training these AI models.

And in my coverage universe for a long time, there's a company Equinex, which is basically a neutral data center provider that almost all of this AI traffic is going to flow through their data centers. And that's a way we've been playing cloud for a very long period of time. But I would focus on those two. Very interesting. Interesting. Kate, I wonder, too, about investors who similarly feel as though, you know, they've kind of been burned chasing one thing and another. But again, these are all good at each company's going to have a slightly different take on this and a slightly different offering for the marketplace. Yeah, there is this muscle memory of people that chase the hype around some of these crypto and blockchain and momentum stocks.

And I think there is an absolute buyer beware, investor beware when it comes to these names and realizing that even the big tech companies talk about this. as a long-term play versus something that's going to pay off in the very near term. And so I think it's important to remind investors that just because something has dot AI on it doesn't necessarily mean that it is the leader by any stretch of the imagination. So I think that is top of mind for a lot of investors that got into some of these momentum stocks. It's also interesting. It might be a sign that some of the froth is returning to the markets. We've seen with meme stocks, we've seen with crypto lately, that you're just seeing this risk appetite return.

so that may also be part of the narrative here. All right, Kate, Timothy, Herb, Steve, thank you very much. We've got tons of questions, obviously. And now we're going to get some answers. Our own John Ford is standing by with CEO, Satcha Nadela of Microsoft for a first on CNBC interview. John. Tyler, thank you.

I am here at Microsoft headquarters in Redmond, Washington. Thank you, Satya Nadella, for having me, CEO of Microsoft. You just got done with the presentation. that struck me as very different because of the velocity with which you're getting technology to market here. But before we get into that, I'm seeing these headlines about the toll of the earthquake in Turkey and Syria, the death toll topping 7,000.

Microsoft is a global company. What's your outlook on that and the response? Yeah, first of all, our heart goes out to everyone impacted, and in fact, our first priority was to ensure even the safety of our own employees in Turkey and Syria. And we've activated our disaster response so that we can be there for any institution, any organization where we can help. And we've also activated our philanthropies and giving so that we can, you know, all support

the people of Turkey and Syria as they go through this. In the Pacific Northwest, you know, this is something that we think a lot about. And so really our heart and bilge spare no effort in helping. Absolutely. I do want to turn to your news of the day, which is pretty monumental in technology. Today's announcement affecting search, affecting browsing. You said it's a new day for search. The race starts today.

Google rules search and browsing. Best case, how long is it going to take you to dethrone them? First of all, it's, you know, to me, these paradigm shifts or platform shifts are a great opportunity. opportunity for us to innovate. The first thing that is a priority for me is not about dethroning anybody. It's more a priority for us to say, how can we rethink what search was meant to be in the first place? In fact, Google's success in the initial days came by reimagining what can be done in

search. And I think the AI era that we're entering gets us to think about it. And that's what we really motivated by, John. And what you saw today in terms of really building not just a new search experience, but thinking of it as what's a co-pilot for the web look like in this AI era is what's exciting. What we saw is a large language model helping to not just compose queries, but deliver detailed answers about things like a multi-day travel itinerary, information about artists in Mexico, Pretty deep. People have been playing with chat GPT and Dali for a while. You're bringing this to market now. What's the economic opportunity?

Well, I mean, we already have an at-scale search business, even though our share, as you rightly pointed out, is very, very small. The good news is we start with already a business that is profitable. And here's the interesting thing. The most profitable, large, software business is search. So I look at this and say, look, I just have to earn one user at a time, an incremental GM. I've never, ever felt this liberated in terms of opportunity in the days ahead. So I'm very excited about innovating,

meeting the needs, knowing that the search category is the most profitable and large category. Just on Bing, Google makes more, I'm just on Windows. Google makes more money on Windows than all of Microsoft. So that alone should, should sort of give us the impetus to really go after this. I saw a report that some time ago you weren't satisfied

with how quickly AI research at Microsoft was translating into product that people could use. Is that the case? And was there a point where you turned the corner on that and you were reaching the cadence that got you to where you are today? Yeah, I mean, I grew up in a company where I was thought not to be satisfied by anything that is happening in this place at any time. And so that's just my general persona, I would imagine. I was thought well by a lot of

other people who came before me on that dimension. But the reality is innovation is an art. Sometimes you get it right. Sometimes you don't. I think where at Microsoft we are good at is to be able to sort of persist. If I think about even with Bing, right, we have learned so much by being in the Bing category that it has helped us, right? We wouldn't be where we are in Azure if it is not for Bing and the distributed systems infrastructure. We wouldn't even have all of the Azure cognitive services if it was not for what was applied AI. So I would say, of course, I want more pace.

And what you're seeing, I guess, this year in particular, is what we've been working towards, John, for the last, I would say, three years to build up. The partnership with Open AI was absolutely instrumental. But beneath what Open AI is putting out as large models, remember, the heavy lifting was done by the Azure team to build the compute infrastructure. because these workloads are so different than anything that's come before.

And so we needed to completely rethink even the data center up, the infrastructure that first gave us even a shot to build the models. And now we're translating those models into products. Some people are going to say OpenAI is not the only AI out there working on these things. Microsoft's certainly not the only cloud company. We think about Amazon, you know, right down the road. We think about Google. how do we measure whether Microsoft really has a significant first mover advantage here?

Is it on the pace at which you roll out this AI technology to other Microsoft product categories and services compared to the competition, the quality and usage of those? Yeah, I mean, it's a great question because at some level I look at, you know, what is it, 48 years after our inception, here we are in 2023, as excited about sort of what comes next as we were perhaps back in the day. And I think the only way to keep up with that and being a consequential company as technology platform shift is to be competitive in each layer. So, for example, we're thrilled about OpenAI's use of the supercomputer.

Guess what? Inception, Mustafa Suleiman's company is on Azure. So is Character.A.I. So there are others who are going to build on Azure, and we welcome them, right? So we want to make sure that the Azure infrastructure is open to everybody. Then we want to make sure that the foundation models of Open AI are available for everybody. And that's where both Open AI will have their APIs. We will have it through Azure.

Then comes our own incorporation in our product. So I kind of look at it and say, usually measure us and customers will measure us by looking at how competitive are we in each layer of this innovation. And so how important is scale and getting to market both quickly and frequently with these updates because AI learns from usage. And so the more usage you get, arguably, I think,

correct me if I'm wrong here, the faster your platform should be learning and the better it should get compared to the other. Like all, you know, tech products have network effects. Feedback loops are super important. There are certain peculiarities, I would say, of AI products. For example, the pre-training data is not just about more data. It has to have diversity of data. So even when we think about scale, you have to think about multiple dimensions, not just scale for scale's sake. But that said, yes, it will be very important. That's why I think it's, important not to be in a lab. You have to get these things out safely. That's why we think about responsible AI and the safety around it, both from the design decisions as well as the technology

as first class. You don't think of it later. You think about it right when you're building the model. And then, yes, the feedback loop at every layer of the stack will be important. Talk to me about the downsides. I know you're a technology optimist. It's my job to try to poke some holes in that because even, I mean, the rust belt was created through. moments and innovations like this. And maybe the AI rust belt won't be a place. Maybe it'll be a category of worker. How much resource are you putting into thinking through those effects and what kinds of mitigations should governments be taking even now to lessen the impact for some workers? Yeah, it's a great, great point. I mean, that's right. I mean, whenever you have any type of,

I'll call it industrial revolution, some people talk about this as perhaps the industrial revolution brought to knowledge work even. And so displacement is harsh, hard, and it impacts people's lives in a generation. That's one of the hardest things. And so I think the first thing is we'll have to probably do some of our very best work in skilling, re-skilling, and wage support for a variety of jobs. These are certain things which I think we as a society in our form of democracies, we'll have to figure this out. But we want to contribute to that. But the other thing, though, I'll just give you one anecdote, though. Take, say, what's happening with power platform product of ours. That's probably the one product of ours which gives me the greatest

pleasure because when I see it, the reason is because whenever I see someone using it, they don't have an IT degree, they are working as a frontline person in healthcare and retail in manufacturing in services. They picked this up, learned how to write an app, automate a workflow. Now, with this open AI model is built in, which is you can prompt a workflow. And they suddenly start participating in the digital transformation of their org, guess what happens? First thing, wage support goes up because they're now considered part of IT. That is one anecdote. I'm not saying that that's the answer, but we should also not fall for the lump of labor fallacy. Right. Because they will be new jobs or existing jobs that are now becoming more productive because of AI that will get better wage

support. And we should tap into all that while being clear-eyed about what we as a society need to do to ensure that any displacement doesn't cause the hardship, like we know, from Industrial England in the 17, 1800s. Yeah, very often the workers who end up benefiting from the wage support are not the same workers who got displaced in the first place. I wonder about that. But this announcement is also happening just after Microsoft

and a lot of other companies are reporting layoffs. We just got layoff news from Dell, which, of course, is one of the companies that uses the Windows operating system heavily. how much clarity do you feel you have into the cost structure of Microsoft heading further into 2023? Is that more a reaction to what has already happened? Or is your cost structure now aligned based on what you're pretty sure is going to happen for the rest of the year? Yeah, I mean, there's, first of all, you know, any of these actions around jobs that Microsoft

is painful for the people who have been impacted and we're trying to do the best we can to ensure that they find their next play. And we also thank them for all the work that they have contributed to Microsoft. So that one point I'd make there is if you look at least the displacement that's happening at Microsoft as well as the rest of the tech industry, this is something that we saw even multiple years ago where the number of tech jobs outside of what is considered the tech industry are higher than what is in the tech industry. It does require relocation, maybe even adjustment in salaries, because tech industry salaries are

different than, let's say, in the auto industry or in the energy sector. But that said, there is going to be labor market movement here, which in the long run, by the way, is going to be beneficial for the tech industry and everybody else. But to your point about our own cost structure, we did have a challenge with our cost structure because the growth did moderate. I mean, that said, I mean, just to put it in perspective,

this is one of the things that I think, especially our investors should think about, is our last quarter, our commercial cloud, constant currency growth was 29%. That's what, 10 times? US GDP, you know, yeah, it's not 40%, but it's 10 times your GDP. It's the largest business at Microsoft. That's the other unique thing about Microsoft is our largest business is a fast-growing

business. And so we want to make sure we invest in it while being disciplined and where we overshot, or quite frankly, it's not even about overshooting on demand. Sometimes you have to take bets in tech, which don't work. And if they don't work, you've got to just fast fail on them. And that's something that we have to learn and get better at. Speaking of fast fail, and maybe this isn't the best transition, the Activision Blizzard acquisition looks to be running into some real headwinds in the UK. How certain are you now compared to where you were that that's going to go through and how important is that to Microsoft?

I saw that Bobby was on your network this morning and I thought he had a good job of explaining why he and I both are enthused about this combination. I think it'll only bring more competitiveness to the gaming industry. And look, I think I look at this and say, at the end of the day, the regulators around the world have to make the choices. And I would only submit to them that if they really seriously think about competition, they have to sort of really reflect on, is this going to be helpful to bring more competition? Right. Think about this.

There are people who make more money in gaming who don't even build games today. Like, maybe we should look at that. That even if you look at the console market, we should probably look at Microsoft's share of the console market in Japan as perhaps a question that somebody should ask and say, oh, wow, I wonder why that is. That's small. And maybe they should actually start competing more. So I hope that the regulators take an approach that is going to truly be beneficial to gamers. It's going to be beneficial to all publishers and make all of gaming more competitive. Finally, I believe it was nine years ago this week that you were named CEO of Microsoft.

Where does this AI announcement, and I take it the series of announcements we should expect from you from here, where does that fit in in terms of strategic importance of all the things that have happened in the previous nine years? It's a great question, John. I mean, one of the things I think a lot about is you can only be relevant in technology if you are good enough to see the, the waves of change and then to reorient your technology and innovation agenda and the business model agenda. So I would say we've gone through some very harsh ones. The last one we went through was obviously the mobile and cloud. We caught one.

We missed one. But the cloud transition was very hard. Like most of what I look around even my senior leadership team, we're all the veterans of that transition. In fact, even Charlie Bell, who came from Amazon, is also part of our team. And he was there when AWS was created. So I feel it's kind of like that. It's 2007, 2008 cloud.

But the one good thing here is the business model side of this because it builds on the cloud. So one of the foundational things about AI, who knows how it'll all reshape all software categories. This is one of those things time will tell. But I'm much more optimistic in terms of Mike, both our capability to lead from day one versus having to do that catch-up,

which we've done too. in some cases. If you're going back 15 years, then it's the biggest thing that happened since you've been CEO. Oh, for sure. This is in 2000. I've not seen, I've always looked at what elite devs are buzzing about. It's sort of the best early indicator.

I've not seen something like this since I would say 2007, 2008, when the cloud was just first coming out. All right. Well, looking forward to seeing how this plays out and to talking to you more about it before too long. Satya Nadella, thanks for joining us first on CMGC. Thank you so much. does. All right, John, our thanks to you as well. John Ford, speaking with Microsoft CEO, Satya Nadella.

A quick mention that the stock remains not off at session highs, a little bit below that level, but rallying nevertheless after their event unveiling Bing with new AI capacities, along with the raft of other products. Let's bring our panel back in now. Steve Kovac, Tim Horan, Microsoft analyst at Oppenheimer, Kate Rudy, and CNBC contributor, Herb Greenberg. It's great to see all of you. Tim, I'll give you the first reaction.

What's your analyst's brain going to do with all this new information? Well, first, Satya's great. He's incredibly aggressive, incredibly competent, and he's obviously very, very excited. I think what came across is the first mover is very, very important in this AI battle. Clearly, that's why Google kind of came out yesterday, announced Bard. Half this battle is going to be PR-based. But Microsoft is great at creating platforms and creating new operating systems. This is probably going to be the Uber platform or Uber operating system that kind of ties together there. other six platforms. So it's a very, very exciting time. Steve? Yeah. So what took out to me there is there was a lot of discussion there about being the first mover, Kelly, right? What he also said was they have Azure, that cloud business. So when the second, third, fourth, a hundredth mover comes in, they can benefit from that too by running it on those Azure Cloud, which again, the cloud, like you just said, cloud is their biggest business, also their fastest growing business. So this benefits their cloud business at the same time as benefiting their office products and all that.

stuff, very reminiscent of the Activision deal, which also benefits their cloud business on top of just getting into mobile gaming in a more significant way. And Herb, he said there at the end, this is the most excited he's been or the biggest opportunity he has seen since the earliest days of the cloud. Yeah, it seemed very genuine. And, you know, I want to go back to one thing he did say. And Steve just mentioned, the largest, our largest businesses are fastest growing business. That's not something you don't want to hear. That's actually something you want to keep an eye on, because I I think that gets to the heart of the Microsoft story again going forward. One thing I did think about when they were talking just on the chat GPC as part of it, being part of it, you know, what we're going to use is will I change my habits? And that's the hardest thing to do. You know, I played around with Bing while this was all going on.

And, you're used to the Google search function. And will you make that shift? And that's, you know, that's, I think remains to be seen for many of us because, you know, go for something that gives us the best result. but it was certainly going through my head. And then I kept thinking about on that search side, how are you going to make money? I still come back to how you're going to make money with it.

How are you going to make money? How's chat cheap? These are the things that everyone still wants to know. We don't know the answers to, but there's obviously profit potential. Herb makes a great point there, Kate, and that is habit change is a sticky thing. But I can remember a time when MySpace was the biggest thing

in the interweb, you know? And then quickly along comes Facebook. and MySpace is gone. There's always a flavor of the week. Genelize and I actually were talking about this offline earlier, just the friction in needing to move your entire life from maybe Google Chrome over to Bing. We were thinking of some of the flavors of the week

in the last couple of years, things like Clubhouse that really took off during the pandemic and some of the more gimmicky, exciting tech availability, although Satya Nidelity, I mean, the fact that he called this the biggest deal, really in his 15 years as CEO, I really stood out to me, his point at the end there, I thought really hammered home the potential for this, and especially this being accretive to Microsoft's revenue.

You think about what the cloud has done for Amazon and companies like Microsoft. They obviously are spending time and resources here. The other thing that I thought was interesting, the industrial revolution point and the potential disruption to the workforce, and how thoughtful he and John were about what this actually might mean going forward and how they're going to react to wages. So that's more of a macro, big picture takeaway. But it's something probably to pay attention to in the other industries we cover and talk about. I also found myself thinking there. I don't know whether you did, but when we talked about staff reductions, my feeling is Microsoft will be a bigger company

a year from now, despite the staff reductions than it is today. Because you never can have too much brainpower on a topic. Let's bring in Jen Elias, CnBC.com, tech reporter. Jennifer, welcome. Good to have you with us. Yeah, thanks for having me, Tyler. You're going to contribute now a little bit about Bard, which I guess Grandly is sort of a reference to Shakespeare. What do you think Google? How do you think Google is reacting to what Microsoft is doing announcing today?

Yeah, I think that they have been reacting since ChatGPT came out, and that is urgently, you know, we cannot let what we call our bread and butter be passed up to a competitor. And so that's why you've seen, we've reported that CEO Sanda Pichai has issued a rallying cry to all employees. You need to test this. That came out yesterday. And prior to that, they were pulling employees out of meetings and saying, we need to prioritize this. This is a code red situation.

So it's clear that they don't want to get passed up in this. At the same time, they are under a huge microscope. They're already being faced with antitrust allegations, disinformation. They have to really make sure what they put out is sound and responsible. So they have this reputational risk they have to worry about, which is what we reported executives set out in all hands meeting in December. So they are definitely, you know, some freakouts going on internally and they're trying to maneuver this as quickly as possible.

They definitely wanted to get ahead of the Microsoft event happening today. And then we reported last night that they also have their own event in Paris tomorrow, which I'm told the search boss there is going to share some more details. So it definitely seems like, you know, we want to do this quicker than Microsoft. We can't let them pass us up. And they're under a lot of financial pressure as well. And Herb, just to your point about how is this going to make money, Sightya did make a comment about how every new user that Bing gets,

because their share is so low, he almost made it sound like it was pure gross margin or something like that. So he probably views it as a high margin, even if it's starting from a small base way to kind of grow that business. And Herb, I'm curious as well, if you would say, well, you know, where's Amazon in this fight now? Yes, they were good at, you know, on voice or where's Apple, right? And by the way, Amazon shares are kind of a weak point in the session today. But where's Apple? They've got Siri. I mean, you have to think, Herb, that all these companies are going to have to throw massive resources into this now in order to keep up with one another.

And let's not forget Facebook, who's chief. technologist or whoever was saying that, you know, Open AI was not as great as it appears to be because they've already been there. So, you know, everybody's going to be fighting for this, for a piece of this, and we'll have a piece of this. But again, it's going to spawn in different directions. And by the way, I sit here saying this knowing, I just come back to knowing that, you know, there are going to be some real disasters here as well. And even what Microsoft is doing will have its, it won't all be in a straight line. That's for certain. You always have to remember that.

You know, as a skeptic here, I have to say that. You a skeptic? You? No. Guys, thank you. And by the way, Steve, not for nothing. They are these places they are fighting tooth and nail right now. Microsoft, Google.

Yeah, like we were saying earlier. And you mentioned Apple. I will just say it's earning season. So we're getting a lot of tech executives talking an earnings call. And all you have to do is be a tech executive with a pulse right now to be asked about what AI is. Tim Cook's answer for Apple? Well, it's already embedded in a lot of Apple's technology. things like that crash detection on the watch and the iPhone.

That's all AI. The way the camera processes your images after you take it, that's all artificial intelligence. It's just under the hood. Meta talked about it too. Advertising. That's all AI powered, targeting you the right way. So they all are doing AI just not as visible maybe as this chat GPT, what we're seeing from Google too. I have a feeling it's about to get a lot more visible, a whole lot more visible.

Siri's going to get supercharged. You wait. Thank you, everybody. Herb Greenberg, Steve Kovac, Kate Murney. Tim Horan and our Jennifer Alliance. Still ahead on Power Lunch. We'll take a check on markets after Powell's comments on the economy earlier on. Dow's hanging on to some gains now.

We'll be right back. All right. Welcome back, everybody. We've got about 13 minutes to go until 3 p.m. Eastern time. Let's give you a check on the markets right now with the industrials up about 4 tenths of a percent. But there you're sort of ascending stair steps. The S&P 500 at 4144, up 8 tenths of a percent. And NASDAQ moving higher by 141, that's better than 1%.

Now for a check on bonds, and let's go to Rick Santelli in Chicago. Thanks, Tyler. You know, since Jay Powell was talking at the Economic Club of D.C., we have seen fives, sevens, tens, 20s, 30s, their yields move a bit higher. But for all practical purposes, a lot of the volatility that we had right before and after Mr. Powell is pretty much washed out to levels very near where they were. But the big issue continues to be last Friday's strong January jobs report. If you look at a June Fed Fund futures, you can clearly see. We had some volatility today, but it didn't really move the needle. What moved the needle was the Friday jobs report.

You could clearly see it there. As a matter of fact, as we hover close to 9490, realize that the low close is 94.86 and a half. And you can see just how close all of a sudden we are. And if you look at three months to tenure, you can see. since the big January strong report, we've become less inverted. That makes complete sense and goes along with the notion that three months and tens is a good recessionary indicator because strength of the economy makes it less inverted, especially labor market. And if we look at two-year no yields, currently at 446, we're about 26 basis points away from

the high yield close early November of 472. And that is important to keep in mind the further down the curve you go, the more the distance they're is there. And finally, the dollar index. If ever, there was a canary in the coal mine for central banks. Just watch the foreign exchange markets. We're up nearly 2% from Thursday's close before the big jobs report because interest rates, of course, have moved higher. Kelly, back to you. All right, Rick, thank you very much. Let's turn to oil. Now, Pippa Stevens, with the numbers there. We've seen a pretty nice rally, Pippa. That's right, Kelly. Oil is closing right around its best levels of the day, rising more than 4% after really steadily climbing higher throughout the session.

Now, a couple of key things are supporting prices, including damages at a key Turkish port following those devastating earthquakes. We also saw Saudi Arabia hike its official selling price for its Arab light grade of crude for the first time in six months, which is signaling optimism over a rebound in Chinese demand. Now, turning to natural gas also on the move, adding more than 4%, although that is still within the context of a bigger downtrend. Now, today, the EIA said that they see Nat gas averaging $3,000. $0.40 per MNBTU this year. That's about 50% lower than last year. Now, looking at energy stocks, it is the top group today led by refiners like Valero and Marathon Petroleum and BP jumping 7% after reporting a record profit for 2022. The company also hiked its dividend by 10% and announced an additional to and a $2.75 billion share buyback.

Kelly. Wow. And a rollback of sorts in stretch. strategies. Pippa, thank you very much. Pippa Steven. Lots of record profits in the oil business to report. All right, let's get to Simomodi now for a CNBC news update. Hey, Seema. Tyler, here's what's happening at this hour. The death toll from the earthquakes in Turkey and Syria have soared past 7,500 rescue teams from around the world have joined the search for survivors. More than 2,100 of the deaths happened in Syria, concentrated in a far smaller disaster area. Germany, Denmark, and the Netherlands have announced another shipment of tanks.

for Ukraine. They plan to refurbish at least 100 older Leopard One tanks with the first of them arriving in Ukraine in the coming months. And Labor Secretary Marty Walsh is leaving the Biden administration. NBC News reports Walsh is giving up his cabinet position to lead the NHL Players Association. Walsh joins Chief of Staff Ron Clayne and some top Biden economic advisors who are stepping down ahead of Biden's State of the Union address tonight. And multiple schools in Michigan have received hoax calls about active shooters today. This school near Lansing was locked down as dozens of officers responded.

Schools in Detroit and Ann Arbor were among those that received those fake calls. Tyler and Kelly back to you. Wow, Seema, thank you very much. Still to come, immobile. A longtime bull, downgrading T-Mobile, citing significantly slowing subscriber growth,

and it has implications for the rest of wireless and cable. We have that next. Welcome back to Power Lunch. Our next guest is changing his tune on one of the big three telecom stocks. Longtime T-Mobile Bull, Craig Moffat of SVB Moffat-Nath-Nathson, is downgrading the stock to market perform yesterday, setting slowing subscriber growth. Shares of T-Moeuvre down about 5% in the past month. Craig Moffat joins us now with more on this call,

and there's big implications for all of wireless and even for cable, aren't there? Craig, welcome. That's right. I thank you, Kelly. Yeah, there are. Look, I mean, the basis of the call is not anything wrong with T-Mobile. I'm still a big believer in the T-Mobile story. The problem is the growth rate of the industry is now decelerating quite a bit. And at the same time, cable is taking a much larger share of total subscriber growth in the industry. And so what's left for the big three that is AT&T, T-Mobile, and Verizon to fight over is getting to be smaller. So let's talk about that incursion by cable companies, including our parent Comcast with Xfinity Mobile. These are services, are they not, that are sold to the subscribers of broadband, generally, of those cable providers, and they use spectrum that they lease from the bigger players.

Am I understanding correctly? How that that recursion works? Yeah, it's not just spectrum, Tyler. They lease the service. It's essentially a resale of the service. That said, they offload a meaningful. amount of traffic from the Verizon contract onto their own network when they can to lower their cost of goods sold. So they actually have quite a competitive cost structure. And the cable operators

are an interesting story here because their growth rate has dramatically accelerated. They're taking half of the net ads in the industry now in the most recent quarter. As you said, they're really selling it mostly to the people who take broadband. That's about half of the country is, or broadband, subscribers from Comcast and Charter. So you could argue they're taking about 100% of the growth in broadband households in America in wireless is now going to the cable operators. That's a really, really big sea change competitively. It tells you how effective the cable operators have been in disrupting this industry. So then is my better investment than we're looking at the three, the big three that you just mentioned there, is my better investment in one of these cable providers

then? I think so. I think that Charter is the most interesting name here. And again, you know, there's this narrative that convergence sort of kills everybody. That is, the cable operators are selling wireless. The wireless companies are selling home broadband. Everybody loses. I don't think that's right. I think the convergence story really favors the cable operators. They're the only ones with a matching footprint of wireless and wireline and a cost structure that really supports taking market share in both categories. Their growth engine in broadband has slowed down some, but their growth in wireless is going gangbusters. And increasingly, as they're sold together, that favors the cable operators. That's so fascinating, Craig. I just want to sneak this

final question in as we kind of think about the fallout. Could this? ever be considered anti-competitive, especially under this kind of administration? Well, if you ever got any kind of M&A, I think yes. I sometimes get the question from clients. Could a cable operator be acquired by a wireless operator or vice versa? I think the answer is categorically no, from a regulatory perspective, there's no way regulators would let this industry consolidate. Sure, beyond what we've already seen, which again, people might feel like it's becoming sort of circular, trying to look for more options. But if it's lowering costs, like you said, the way that they're able to kind of flex, then

perhaps that is a good thing. Still, it's a fast. It's a big call I know by you and a heartbreaking one, too, it sounds like. After 10 years of recommending T-Mobile almost continuously, it's hard sometimes to know when to sell the winners. I know. Like I said, I still believe in the T-Mobile story, but I think it's harder to see it outperforming from here.

Craig, thank you for joining us, Craig Moffens. And thank you for joining us on Power Lunch today. Very busy hour. Busy hour. Closing bell starts right now.