Market is slightly more confident that Fed will hike rates in March - BBH

"The most recent data strengthen the conviction that the US economy finished 2017 on a firm note.  The Atlanta Fed's GDPNow tracker was boosted to 3.3% from 2.8%.  The New York Fed's model is tracking 3.9% Q4 GDP and 3.2% Q1 18 GDP," BBH economists note.

Key quotes

The market is slightly more confident that the Fed will hike rates in March.  The implied odds rose to almost 88% from a little less than 70% than at the end of last year.  The US 2-year note poked through 2% before the weekend, though the last price was just below that threshold that has not been seen since the financial crisis.   

Market-based measures of inflation are rising.  The two-year breakeven rose to 1.74% at the end of last week and represents more than a 40 bp increase since the end of November 2018.  The two-year yield has risen by half as much.  The 10-year breakeven pushed to has moved above 2.0% this year and is within spitting distance of last year's 2.07% high.   It was near 1.88% at the end of November.   The 10-year yields have risen by about 20 bp over the same period.  

Walmart joined a growing list (now reportedly over 100) of companies who are giving employees bonuses or other payments (like 401k contributions), and some are boosting wages.  The companies are citing the recently passed tax cuts.  Although there may be some cynicism over motivations, there are two important takeaways.  First, these actions coupled with minimum wage increases should help boost income (and therefore consumption).  Second, the bombastic rhetoric should not distract from the fact that through the tax cuts, deregulation, and federal court appointments, the Trump Administration is implementing the traditional (US) conservative agenda.

This is creating a large windfall for corporations and their owners that may not be fully appreciated.  The US Q4 corporate earnings season kicks off formally in the week ahead.  The earnings of the S&P 500 are expected to have risen by about 12% from Q4 16.  The S&P 500 rose 19% in 2016. 

Meanwhile, the political drama will be about the spending authorization that ends January 19.  Part of the compromise to extend the spending authorization, and unlike the tax cuts, Democrat votes are necessary, entailed a resolution of the status of the undocumented immigrants who came to the US as children.  But President Trump's recent comments have threatened to sour the negotiations.  This means that there is a greater risk that "non-essential" functions of the government may experience a shutdown. 

It seems to be more a political calculation (who will be blamed?) than a principle or economic interest at stake.  Still, in lieu of a formal agreement that would address the discretionary budget, a continuing resolution that kicks the can a few weeks appears to be the most likely scenario.  That would have a limited market impact, and we suspect a short closure of the government would not be disruptive, even if embarrassing and seemingly politically inept.