The story of January so far is that US economic data has been better than expected and that's pushed up Treasury yields.
US 10-year yields have risen to 4.16% from a low of 3.78% on December 27. That puts 10s right about where they were at the start of September.
The message from the market is increasing comfort that a soft landing is coming but also a re-think on how much the Federal Reserve might 'normalize' policy in that environment. The market has priced in as much as 165 bps in easing in 2024 but that's dwindled to 131 bps as the market senses more patience from the Fed and fewer 'insurance' cuts, particularly with US equities hitting all-time highs.
In terms of the cadence, today the odds of the first quarter-point cut coming in March fell to 48%. That's the first time below 50% this year and is down from above 100% in December.
Looking further, the market is pricing in 30 bps in cuts for the May 1 meeting, 53 bps for the June 12 meeting and 74.6 bps for the July 31 meeting. For September, 97 bps are priced in and 114 in November.
In contrast, the Fed funds dot plot shows three cuts for the entire year.
Importantly, cuts could be priced back in as quickly as they've come out. A low PCE report next week or weak January non-farm payrolls would put cuts squarely back on the table. That's in fitting with the high emphasis that Fed officials are putting on incoming economic data.
What stands out to me is the contrast between the latest US economic data and elsewhere. In many countries, the numbers are clearly deteriorating and that will make cuts more of a necessity. However some of those countries still have higher inflation than the US and nearly all of them have lower benchmark rates.
Ultimately, I believe that this still puts the US dollar in a good position because the market will look at higher terminal rates rather than the pace of cutting but if US economic data stumbles, so will the dollar.