‘Markets need to accept recalibration of rate cut expectations’ – Versace

IGTV financial analyst Angeline Ong also asks Versace how investors should position themselves amid rising tensions in the Middle East and an upcoming US election.

(Partial Video Transcript)

December retail sales figures hotter than expected

Angeline Ong: Hello and welcome to IG's trading the markets with me today, a very special guest, Chris Versace, CIO of Tematica. He joins us from Washington after some really interesting figures are hotter than expected. US retail sales figures, we're seeing US stocks indicating an extension of losses ahead of the open. Just tell us what your early views are of these numbers, and are we are we getting a sense that markets are finally recalibrating?

Chris Versace: So, a lot to unpack there. Let's take the December retail sales, as you pointed out, stronger than expected. But it really reflects what we've seen over the last couple of reports. Consumers continue to eat out. So we look at the restaurant line item up almost 11% year over year in December. We take a look at non-store retailers - you know, wink, wink, nudge, nudge, digital shopping - also up substantially year over year. You know, just pretty much continuing the trends for what we've seen.

Economy more resilient than expected

Chris Versace: But the key takeaway is consumers opened their wallets more and spent more. But that also means that the December retail sales report is going to be a positive when it comes to GDP. Expectations for the fourth quarter coming into the report was around 2.2% year over year, according to the Atlanta Fed. Again, that number is likely to go higher. What's important about that is it says the economy continues to be more resilient than expected. How does that tie into rate cut expectations while it says that the Fed can take its time. And that's exactly the message that the Fed has been delivering.

And you are correct - we are seeing the market finally come around to recalibrating its expectations for rate cuts, not just by the Fed, but also by the European Central Bank. Christine Lagarde, the president there, was out saying that, look, we are going to cut rates, but not until the summertime. The expectation had been as soon as March, maybe April. So all in all, just a big push back, big recalibration, big rethink on the timing of rate cuts. And that is what's weighing on markets. We're seeing the dollar strengthen and we're going to have to watch the CME FedWatch Tool to see if the market really pushes rate cut expectations by the Fed from six to five to four.

(Watch the video to hear the full interview.)