The US S&P Composite Purchasing Managers’ Index (PMI) saw a slight improvement in January, reaching 52.8 from 52.7 in December. This reflects a modest increase in business activity within the US private sector.
In detail, the Manufacturing PMI went up to 51.9 from 51.8, while the Services PMI remained steady at 52.5. Both figures were marginally below what analysts had anticipated.
Factors Influencing Economic Growth
The report attributes the sustained economic growth at the start of the year to steady conditions, though noting a cooling rate of expansion compared to earlier months. The increase in costs, largely attributed to tariffs, continues to drive up prices for goods and services, posing concerns over inflation and affordability.
Regarding market impact, the US Dollar Index remained largely unaffected by the release of the PMI data. It maintained stability, trading around 98.28 on the day of the announcement.
The latest PMI data indicates the economy is still expanding, but the pace has cooled compared to the faster growth we saw in the fall of 2025. This suggests the strong market rally from last quarter might be losing momentum. We should prepare for a period of slower gains in the major indices.
The concern about rising costs from tariffs is significant, especially after we saw the Consumer Price Index resurge to 3.4% year-over-year in the final quarter of 2025. This sticky inflation, a ghost of the 2022 spike, complicates the outlook for monetary policy. These persistent price pressures mean the Federal Reserve has less room to maneuver if growth slows further.
Monetary Policy Outlook
Remembering the strong December 2025 jobs report, which added over 200,000 jobs, the Fed has little reason to restart the rate-cutting cycle it paused last November. The market’s pricing for rate cuts in the first quarter of this year now looks highly improbable. We should adjust interest rate derivative positions to reflect a “higher for longer” scenario.
This mix of slowing growth and persistent inflation is a classic recipe for increased market volatility. The CBOE Volatility Index (VIX) has already climbed from its 2025 lows, and we expect this trend to continue. We believe purchasing options to hedge long portfolios or establishing long volatility positions is a prudent move for the coming weeks.
Given the uncertainty, equity markets are likely to become more range-bound rather than continuing a clear upward trend. This makes strategies like selling iron condors on the S&P 500 attractive, as they profit from the index trading within a defined price channel. This is a shift from the directional bets that paid off so well in late 2025.
