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.