The market is realizing the Fed can't cut rates yet: Strategist
Stocks fell Wednesday after December's retail sales data tempered investor expectations of an early interest rate cut by the Federal Reserve, according Northwestern Mutual Wealth Management CIO Brent Schutte.
"The market is figuring out the US economy is too strong for the Fed to cut rates,” Schutte told Yahoo Finance Live. “The reason the market is struggling just a bit is because the market, which had priced in aggressive rate cuts, and that led to the fourth quarter rally, are now starting to take those out, and that's causing higher interest rates and causing stocks to push a little bit lower.”
Schutte added: "The last mile [to tame inflation] is still hard and I don't think the Fed cuts until they see that happening… and that largely means you're going to have a recession because they're going to keep the pressure up until they see the labor market weaken."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Nicholas Jacobino
Video Transcript
[AUDIO LOGO]
BRAD SMITH: December retail sales out this morning showing that US consumer spending continued to prove resilient to round out 2023. But on the other hand, another economic powerhouse continues to struggle. China's economy slowed to a three-decade low in 2023.
Brent Schutte, who is the Northwestern Mutual Wealth Management chief investment officer, is here to help us break it all down. How surprising, from your perspective, is it reading like this, Brent?
BRENT SCHUTTE: Well, I think the retail sales number was strong, but as your prior guest mentioned, I think there are signs that the consumer is starting to feel a little bit of the higher interest rates. And I think the market is now figuring out that the US economy is still too strong for the Fed to cut rates, that inflation is not dead.
We saw that in last week's CPI numbers, where core CPI continues to come in the low 3%, as well as some of these trim mean measures that are trying to tease out the underlying pace of inflation. They've actually accelerated over the past few months.
And so to me, the reason the market's struggling just a bit is because the market, which had priced in aggressive rate cuts, and that led to the fourth quarter rally, are now starting to take those out. And that's causing a little bit of the higher interest rates, and causing stocks to push a little bit lower.
BRAD SMITH: And so kind of compare that for us, because here in the US, there's the resiliency, but then in China, there's the effort to try and stimulate the economy and the spending. So if we're comparing and contrasting what's taking place and where there are perhaps some overlaps-- because earlier in the trading session, we saw stocks moving lower largely in reaction to that data that came out of China. And then you got the add-on with a surprise report in the US retail sales figure as well.
BRENT SCHUTTE: Yeah, look around the globe, the economy is slowing. You look at it in Europe, it's slowing. You look at it in China, it's slowing. Certainly the Chinese economy has been slowing for some time. They have a large set of issues they're dealing with.
And so to me, it's not surprising that you're seeing economies around the globe slowing at similar times just because of the impact of rate increase that has occurred. China's a little bit unique in its own right, where it has actually been trying to stimulate just a bit, but certainly not enough to pull their economy out of the doldrums that it has seen over the past few years.
SEANA SMITH: So Brent, in the market action today and what we heard from Waller yesterday, taking all that into account, we're starting to see maybe a bit of an adjustment in terms of the timing that rate hike, like you just alluded to a minute ago. I'm curious how this has-- has that at all impacted your view and your expectations for rate cuts and the timing of them?
BRENT SCHUTTE: Look, we don't think the Fed's going to cut rates unless they see wages move sustainably lower. And so the reason why inflation pulled back last year was largely, as we expected, because it was tied to COVID. What you are seeing now is that inflation is tied more towards the end of an economic cycle, where we run out of workers to hire.
You mentioned it in your UN [? HB ?] report where you said a shortage of labor, a shortage of lumber leading to higher prices. That is not disinflation. And so to me, the Fed does not cut rates until it sees the pace of wages slow and until it sees the inflationary numbers come down much more, which they've actually stalled out at 3%.
I think the last mile is still harder. And that's where I don't think the Fed cuts until they see that happen. And that largely means that you're going to likely have a recession, because they're going to keep the pressure on the US economy from a rate perspective until they see the labor market weaken. And typically once that happens, it tends to trend.
