The US S&P Composite Purchasing Managers’ Index (PMI) showed a slight rise in January, moving to 52.8 from 52.7 in December. This signals a small uptick in business activity in the US private sector. Breaking it down, the Manufacturing PMI increased to 51.9 from 51.8, while the Services PMI stayed the same at 52.5. Both numbers were slightly lower than analysts expected.

Factors Influencing Economic Growth

The report points to steady conditions as a reason for ongoing economic growth at the year’s start. However, it notes that the pace of expansion has slowed compared to earlier months. Rising costs, mainly due to tariffs, are pushing prices up for goods and services, raising concerns about inflation and affordability. In terms of market reaction, the US Dollar Index was mostly stable after the PMI announcement, trading around 98.28. The latest PMI data suggests the economy is still growing, but not as quickly as in the fall of 2025. This indicates that the strong market rally from the last quarter might be slowing down. We should brace for slower gains in the main indices. Worries about rising costs due to tariffs are serious, especially after the Consumer Price Index jumped to 3.4% year-over-year in the last quarter of 2025. This ongoing inflation complicates the view on monetary policy. Persistent price increases limit the Federal Reserve’s options if growth weakens further.

Monetary Policy Outlook

Considering the strong December 2025 jobs report, which added over 200,000 jobs, the Fed has little reason to restart rate cuts that paused last November. The chances of rate cuts in the first quarter of this year now seem unlikely. We should adjust our interest rate derivative positions to reflect a “higher for longer” scenario. The combination of slowing growth and lasting inflation typically leads to more market volatility. The CBOE Volatility Index (VIX) has already risen from its 2025 lows, and we expect this trend to continue. We think buying options to hedge long portfolios or taking long volatility positions is a wise choice in the upcoming weeks. Given the uncertainty, equity markets are likely to trade within a range rather than follow a clear upward path. This makes strategies like selling iron condors on the S&P 500 appealing, as they profit when the index stays within a certain price range. This approach is a shift from the directional bets that worked well in late 2025. Create your live VT Markets account and start trading now.

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