Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.

My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones.

But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…

It’s easy to see where inflation has already affected the economy since the pandemic began…

Food prices are up 6.3%.

Rent’s 4.2% higher, clothing and footwear are up 6%, and furniture prices are up almost 14%.

And at the upper extreme, gas prices are up 50%!

According to one report, last year even televisions went up in price for the first time in 40 years.

No wonder inflation remains all over the news…

Everywhere you look, inflation is taking a toll. And that’s if you can even get your hands on the goods that you want in the first place.

Because of these rapidly rising prices, the Fed needed to step in and raise interest rates to tame inflation…

Which has led to constant speculation about the expected size and number of interest rate rises beginning next month.

Coming into the end of 2021 with inflation starting to boil over, most economists predicted around three to four rate hikes in 2022.

But it took little over a month for those predictions to ramp up much higher. It’s almost as if some economists are placing bets on who can predict the highest number of increases.

With so much focus on inflation, it’s easy to forget about something else the Federal Reserve watches just as closely… employment numbers.

It’s All About Jobs

The jobs data released last Friday certainly showed some strong numbers.

Nonfarm payroll data showed that the economy added 467,000 jobs in January. That’s more than triple the 150,000 forecast.

And in a promising sign that the peak of the Omicron strain may have passed, a lot of those new jobs were in leisure and hospitality.

Those two sectors added the biggest number with 151,000 new jobs. Specialty food services and drinking establishments (like bars) added 108,000 new jobs.

While the unemployment number rose slightly from 3.9% to 4.0%, this is due to a 0.3% increase in the participation rate of people actively looking for jobs.

To better understand the recent unemployment data, it’s worth looking at a historical comparison…

The chart below shows the unemployment rate going back to the start of 2020. In January and February, the unemployment rate was 3.5%, before rising to 4.4% in March.

It’s easy to guess when COVID struck…

You can see just how hard the pandemic hit the economy in April 2020. The unemployment rate almost hit 15%.

Since then, it’s been in a clear downwards trend…

U.S. Unemployment Rate


Source: Trading Economics, U.S. Bureau of Labor Statistics

In all but one month (June 2021), the unemployment rate either stayed the same (as the previous month) or continued to fall.

Now with the latest data, we’re seeing only our second increase since April 2020.

There’s no reason to fret over a single 0.1% rise. But right now I’m more interested in knowing if the U.S. economy is as close to full employment as it’s going to get.

Remember that one of the Fed’s key goals throughout 2021 was to get employment back to pre-pandemic levels. That’s one of the reasons they held out so long on rates.

Whether it’s due to changes in demographics or industry structures – or even that some folks simply can’t (or won’t) return to their previous jobs – it appears unlikely that the unemployment rate is going any lower.

This will be especially true when rates start to rise.

That’s why in the jobs data last Friday we saw that wages are starting to rise more rapidly. The average hourly earnings rose 5.7% year-over-year (the biggest gain since May 2020) and 0.5% above forecasts.

If that rise continues, it will add fuel to inflation… and the need to raise rates.

However, while inflation numbers continue to attract headlines, I’m going to keep an eye on unemployment. And you can bet the Federal Reserve will too.

If the unemployment rate starts to tick up, the Fed will likely pull back on raising rates anywhere near the level that some in the markets predict.


Larry Benedict
Editor, Trading With Larry Benedict

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