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’ve been 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…

Skyrocketing volatility has created wide-spread fear in the markets right now.

Just this week, the CBOE Market Volatility Index (VIX) hit its highest level since October 2020.

And there’s still a lot more volatility to come.

You only need to consider the action in the S&P 500 on Wednesday. After rallying 2% in the morning, those gains all evaporated in the afternoon.

To make money in these markets, you’re going to have to be very quick on your feet and take your profits when you see them.

Winning trades can turn into losers in the blink of an eye.

But here’s the good news… this kind of volatility always throws up plenty of opportunities.

As usual, the reason for the volatility comes back to the Fed. Right now they’re frantically trying to get back in front of the inflation curve.

And to do so, they’re going to raise interest rates. The exact amount is yet to be determined…

But it’s possible the Fed could raise rates more often than the market thinks… potentially even at every meeting this year.

Today, I want to discuss how rates might not rise as fast and hard as people think.

Taking the Heat Out of The Economy

The Fed doesn’t just adjust rates… They can also convince the market that they might increase rates more than expected.

It’s all part of the central bankers’ toolbox to try and take some heat out of the economy and inflation.

While there’s plenty of information about the supply side of inflation (bottlenecks, shortages in both goods and workers), demand is an equally important part of that equation.

And nothing takes the heat out of demand quite like the threat of rapidly rising interest rates.

However, even before the first rate increase hits the market (scheduled for March), we’re already starting to see evidence that some of that heat is dissolving.

That means the pressure on the Fed to rapidly raise rates could also start to decline.

You might remember last Friday’s essay, where I introduced the PMI Composite Index.

The PMI Composite Index tracks the health of goods and services businesses by surveying key data from the purchasing managers. I follow it closely because it’s as close to a gauge of the real economy as you can get.

Forget bureaucrats or economists typing data into their models from the luxury of high-rise offices…

Instead, the PMI survey gets right into the nitty-gritty.

This includes how many employees these companies have hired (or fired), the size of their order book, and how much their input costs are rising or falling.

On the chart below, compared to when we looked last week (red arrow) at the data from last month, you can see just how much (and how quickly) things have changed…

(Remember, a reading above 50 means business activity is positive and expanding, and below 50 means business conditions are contracting.)

United States Composite PMI


Source: eSignal

Despite the overall forecasts of 56.7 – and a reading of 57 last month – the first Composite PMI estimate for January fell heavily to 50.8. That means it’s barely in positive territory.

That makes it the slowest rate of business expansion since July 2020.

A big part of the slump was contributed to the usual reasons… supply chain disruptions and labor shortages as a result of COVID. Government restrictions to export markets also played a part.

However, the one thing that stood out had to do with input costs…

Data showed that input cost inflation was running at the lowest level since March 2021. As higher prices had already weakened business confidence, some of that heat was already starting to come out of demand.

And now, with the fear of more interest rate rises than first expected, we’re going to see even more demand come out of the economy.

Put the two together and the case for a string of rate increases throughout the year might not be as strong as the experts now believe.

Don’t get me wrong… interest rates are going to rise.

However, with lower demand already taking some of the heat out of inflation, they just might not rise as far and fast as the markets think.


Larry Benedict
Editor, Trading With Larry Benedict

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