Markets ‘getting ahead of themselves’ in predicting Spring US rate cut
Tematica CIO Chris Versace tells IGTV financial analyst @AngelineOng why investors keen on a US interest rate cut in Q1 could be let down and why discount US retailers will continue to outperform this holiday shopping season.
(Partial Video Transcript)
Will our rate-cut hopes be dashed?
AO: Hello, welcome to IGTV's trading the markets. I'm joined by our guest all the way from Washington, DC, Chris Versace, chief information officer (CIO) of Tematica. Thank you so much for joining us so early in the day.
I guess the biggest question that all our viewers wanted to hear about is this pivot in the rate expectation. Suddenly, everyone's looking out for this set rate cut by spring. Do you think this is just everyone getting ahead of themselves?
CV: Well, if we take a look at the market, the S&P 500 went from being oversold in late October to, depending on the indicators you're looking for - short term overbought, potentially even intermediate term overbought. And the big driver of that has been the notion that inflation is indeed once again accelerating to the downside.
Market over-anticipates Fed's actions
We saw that in the October consumer price index (CPI) report and the October producer price index (PPI) report, it actually showed the deflation in the intermediate category. So, the question is fair. Let's remember, though, that we’ve seen the market continually over the last year get ahead of itself, over-anticipating what the Federal Reserve (Fed) may do.
AO: And do I think that we're likely to see the first rate cut in the middle of 2024?
CV: I think that's the case. Maybe that June, July meeting. Yesterday when we got the Fed meeting minutes from November, there wasn't even a word mentioned of a rate cut. So, I think we're going to need to see more progress in the data.
Remember, we will get the October personal consumption expenditure (PCE) price index next week and then, before the Fed's meeting in December, we'll get another round of CPI and PPI data. I think at that meeting is when we'll start to hear them start saying, OK, what would it take for us to cut rates? Let's start having that conversation.
So we do, I think, have a risk inside the market that, yes: it's over-anticipating what the Fed may do, or how soon it may do something.
US job data shows recession may not be imminent
AO: Of course, at the same time, Chris, the dollar has fallen. Looking at the US dollar basket there since that pivot, but the job market, just looking at the data earlier recession, job market continues to confound economists as well as those forecasting or were forecasting a 2024 recession.
The number of Americans filing for new unemployment benefits fell by 14,000 over the week ending 18 November 2023. And also perhaps the retail figures that we're going to see coming through, do you think that might show us perhaps a kick up in inflation as well?
CV: Perhaps it hasn't really gone away, that problem? So I think if we look at some of the data that we've got and including some of these aggregated rolling gross domestic product (GDP) forecasts from various Fed banks, they all point to around 2.2% GDP for the current quarter.
Now, to be fair, we have a lot more data to go. We're only halfway through the quarter. But so far, the speed of the economy in its current quarter is on par with the first half of the year. Yes, slower than that hot 4.9% print for the third quarter, but it's not falling off a cliff.
And so far, it would seem to suggest that we're on a glide path. This soft landing is increasingly likely. Now, we're going to want to verify that with some upcoming data.
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