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Labor market remains 'quite robust' amid flagging recession calls: Strategist

Oxford Economics Chief U.S. Financial Economist Kathy Bostjancic and Insigneo CIO Ahmed Riesgo join Yahoo Finance Live to discuss the latest inflation data and what it says about the job market and the overall stock market.

Video transcript

RACHELLE AKUFFO: Well, for more on what's happening with the markets, let's bring in Insignio Chief Investment Officer Ahmed Riesgo, and Oxford Economics Chief US Financial Economist Kathy Bostjancic. Thank you both for being here.

So, first, I want to start with you, Kathy. In terms of the economic environment, with this latest data added in, how should we be characterizing how the US economy is doing right now?

KATHY BOSTJANCIC: Well, thank you. I'm happy to be on with you today. It's a unique business cycle. So the numbers, at times, can be a bit confusing. But what we're seeing is that inflation pressures are easing. And it's mostly on the goods sector. As you said earlier, the core service side of the equation still looks quite sticky to us. And that's really being led by higher rental-- residential rent prices.

Yes, hotel prices were off, car rental prices were off. But in general, the core service prices is something that we're watching closely. So the inflation picture is getting better. It's going in the right direction. The overall economy is slowing. Labor market still remains really strong.

And just one last point bringing that back to the inflation picture-- if you look at wages, especially services jobs, the wage growth is still quite strong. That's going to have a good correlation with core service prices. So that's something we have to keep in mind. And we're not done yet. We can't call a victory on inflation.

AKIKO FUJITA: Yeah, Ahmed, let's talk about the market reaction. You heard Kathy there say that we're not out of the woods just yet. Yet when you look at the reaction today, there seemed to be some relief, at least in the number, that it didn't tick higher than expected. How did you view it in the market context?

AHMED RIESGO: Yeah, I mean, we think, actually, the market reaction is pretty in line with what we've been seeing. We've actually been pretty sanguine on the US outlook. We've been pretty adamant saying that we're not in a recession in the United States, despite the two consecutive GDP prints, primarily because of the strength of the labor market. And that's still quite robust.

So we continue to see gross domestic income in the United States quite high, definitely not in negative territory-- perhaps not as robust as it was earlier in the year. I think the market is cheering right now is it's taking kind of the worst case scenario for the Fed, or at least a Fed rate hikes, off. Where we are disagreeing with the market and we think the market might have sort of swung too far in the opposite direction-- markets are already pricing in 50 basis points of rate cuts into 2023.

And precisely because we see the US economy in relatively good footing going forward, and we do see inflation coming down, mostly because of decreasing margin costs and rising inventory levels, we don't think the Fed's going to be able to cut as much as the market is currently expecting. So that could lead to some volatility down the line. We're looking at, perhaps, more in 2023-- but for the rest of the year, we're pretty sanguine on the outlook.

RACHELLE AKUFFO: And, Kathy, obviously, consumers happy to see gas prices at the pump continuing to tick down-- around $4-- just slightly over $4 a gallon right now. And also, obviously, oil prices still continuing to tick down-- how enthusiastic should we be, though, about this trend? Is this one that you expect to continue? Or are we, perhaps, unprepared for some surprises ahead?

KATHY BOSTJANCIC: Well, we think that it will continue. If you look at futures prices for gasoline and oil, it does look like we're on a downward trend. But you're right, at any given month or any unseen exogenous shock could send prices soaring again. So we do have to be careful there.

But I do think we're going to get some reprieve. I think the big question is on the food category and food prices, they continue to soar higher. We're up almost 11% year-on-year for food prices. That's the fastest pace since 1979. Is the consumer going to get some reprieve there?

And there's some indications that may happen, but it's going to be a little bit more delayed relative to where-- commodity prices, which have already fallen. But if food prices come off, that's really going to be another boost to consumers. And I think we're going to see consumer sentiment confidence measures start to get a bit of a lift and come off of the lows that we've seen.

And that certainly can help. And it'll help with purchasing power, right, and help stabilize the economy. We're a little less rosy on the outlook for next year. We don't think recession is baked into the cards, but we do see economic growth continue to slow. And we think by the end of next year, actually, we do think the Federal Reserve will be lowering rates pretty aggressively because inflation will be lower and economic growth as well.

AKIKO FUJITA: Ahmed, when you think about the sectors hit hardest on this expectation of more aggressive rate hikes, obviously, high growth tech names getting hit-- we've seen some of that money flowing back in. Today, tech, one of those sectors that's leading the way-- are we starting to see that debate, growth versus value, kind of reverse? Or is it too soon to make that shift in your portfolio?

AHMED RIESGO: Yeah, we think it's too soon. I mean, there is, obviously, an opportunity for short-term bounce for growth and growth factor-style equities. But if you look at historical valuation metrics, it's still quite expensive versus value. Historically, growth tends to trade at around a 54%, 55% premium to value. That got as high as to 130% just six months ago.

We're only down to about 90% there. So if you look at historical levels, it's still expensive. So I still think, if anything, this is a good opportunity to sell out of growth with this recent bounce and keep tilting further into the value space, which still remains historically cheap versus growth.

RACHELLE AKUFFO: And, Ahmed, just a quick follow-up there-- in terms of any sectors that you're starting to rotate out of, what's on the agenda there?

AHMED RIESGO: Well, we are looking, more than anything, to buying some dips that we've had in some of these prices-- like, even the commodity complex, the energy sector, which has come off the boil a bit, we think that we're sort of in the early stages of a long-term, multi-year commodity supercycle. And it really has nothing to do with demand side, it has simply to do with the supply side.

Most commodity markets, with a few exceptions, such as iron ore, most of them are in physical deficits. And we really don't see these being resolved any time soon. So we think the drift in commodity prices will continue upward in a multi-year horizon.

So we're looking to add there. We're also looking to add, generally, in sectors that have high dividend, high income stocks, because we think those are the ones that tend to perform better in a high inflationary environment, which, unfortunately, we think we're going to be in for quite some time. Inflation is not going to be at the levels we saw earlier this year, but I do not see it dipping down to the 2%, 2.25% long-term Fed comfort level anytime soon. So we think that those stocks will continue to outperform.