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Why the November jobs reports is of ‘exaggerated importance’: Strategist

Deutsche Bank Chief Investment Officer Deepak Puri joins Yahoo Finance Live to discuss the November jobs report, economic uncertainty, recessionary risks, the Fed, and the outlook for markets.

Video Transcript


JULIE HYMAN: As we approach the end of the year, let's take a look ahead to where the market and the economy might be heading in 2023. Deutsche Bank is calling for a dip in US GDP going into the first two quarters of 2023 before recovery.

Here to talk about this prediction and more is Deepak Puri, who is Deutsche Bank's International Private Bank America's CIO. Deepak, thank you for being here. So you all seem to be in the recession camp, two quarters of a contraction before a recovery.

Kind of set the stage for us, if you will. Do you think it is going to be the Fed that is the thing on which the recession hinges?

DEEPAK PURI: Good morning, Julie. Great to be with you. So first couple of things, the recession is a mild one. So you look at the definition of a recession from National Bureau of Economic Research, right? The four D's-- the Depth, Duration, Deceleration, and the Diversification. And I think what we're going to see is a mild recession.

And this is something the Fed has already talked about, the lagged effect of the cumulative actions that they have taken this year, which have been severe by any measure, right? Very aggressive. We are almost at 4%. More likely, our base case is another 125 basis points of rate tightening. You know, that would have an impact.

Historically, you have seen GDP contract with that kind of a rate hike. Same goes for, you know, labor pains. We haven't seen that yet. But our expectation is that starting the first quarter of next year, we start to see this milder trajectory a little bit different than what we've been used to over the last couple of months, I would say.

BRAD SMITH: Deepak, even in a mild recession, is there anything that would cause the Ped-- the Fed, excuse me, to pause its rate policy?

DEEPAK PURI: Yeah, you know, they have telegraphed it well. And I think the two things that they are looking for is, A, the sequential decline in the inflation print. And we started with the 7.7 October number. That's a great start. So we need some of-- a few of those to happen, Brad, before we at least fulfill that criteria.

And the second one would be the stability in the inflation expectations, the long-term inflation expectations, which have started to also be well-anchored. So I think those two are there.

But the third, the not much telegraphed, is really the Fed would like to see some labor market softness. And that's why, I think, this week's nonfarm payroll numbers on Friday takes exaggerated importance.

But in general, the Fed is looking at inflation, as they always do. But also they would like to see a little bit of softness in labor markets. They want to see the JOLTS number become a little bit more from a historical perspective, you know, less, you know, in terms of the people looking for jobs. Same goes for the ADP reports.

So you're gonna see a number of labor market statistics that could have an influence on the Fed measures. But as of today, at least, we don't see that changing substantially over the next few months.

So the Fed pause, what the market might be looking for, might be a little bit delayed. But it's not-- it is going to happen most likely in the first half of 2023.

BRIAN SOZZI: Deepak, within your call for a recession, how many jobs is the economy creating each month?

DEEPAK PURI: Well, in that particular scenario, you know, we've been used to 350,000-plus job gains over the last 12 months. We're still expecting 200,000, you know, headline gains this Friday.

You are looking at a sub-100k, you know, job gains. That would be enough to actually start looking at a little bit of a decline or an uptick in the U3, in the unemployment rate.

And, you know, in the past recessions, in the mild ones, even 50k to 100k tends to be the norm. And I would say that would be the norm this time around as well. But you also want to see it, you know, U6 number, the underemployment number, you want to see the seasonal hiring, which would be a good sort of a barometer as a precursor to what could happen to full-time employment.

And then average hourly earnings. You know, the wage inflation is a key criteria for the Fed to look at. I think if you start seeing downward pressure on AHP, that would also means that the overall expenditure that's going on into the labor market is going down, which would be something. It's perverse way of saying, but it would be welcome news for the Fed at this point.

JULIE HYMAN: And Deepak, let's put this all into your outlook for US equities. You know, the conventional wisdom is that you do see stocks bottom before the recession, right?

And that said, it's not as though you're expecting things to go off to the races. I believe you're year-end target for next year for the S&P 500 is only 4,100. So you know, kind of, I guess a little bit of a gain but, you know, not much of one.

DEEPAK PURI: That's correct, Julie. I mean, you know, the mild recession sort of puts a tab on the-- on the very strong uptick in equity markets that one would recommend. And also that Fed is not done with its hiking cycle. The Fed speak recently has sort of communicated that to the market in various forms that, you know, don't expect a much lenient Fed going forward, at least as long as those criterias that I was talking about are fulfilled.

I think when you zoom out, the risky assets are a little bit better placed right now than maybe a year ago or maybe at the start of this year. First, you know, the markets are getting used to higher rates, which is a very psychological difference than when you first give the shock of a rate hike to the markets. So A, market is getting used.

Secondly, the market expectations and the Fed guidance are aligned to a large extent, which is a departure from what we had in the first half of this year where every subsequent Fed speech was a little bit of a, you know, dislocated with the market expectations were. I think that trend really changed in the Jackson Hole summit.

So today, the market expectations with regards to rates and the Fed guidance is-- in terms of their base-case scenario-- is a little bit more in line. And I think those two things gives us the impetus to put a higher number than where we are today. But the fact that we are going to be heading into a mild recession would keep a lid on this, you know, upward trajectory.

JULIE HYMAN: Deepak, good to see you. Thanks so much for sharing your outlook with us. Deepak Puri is Deutsche Bank's International Private Bank CIO of the Americas. Appreciate it.