Normalise without tantrum

While the theme of normalisation is progressing rapidly and spreading, the markets are clearly having a turbulent start to the year. US real rates have already risen by almost 60bp this year and US equity indices are in the red. However, risky assets remain resilient overall and monetary and financial conditions remain ultra-accommodating. All eyes will be on the Fed next week, with an FOMC that could announce a first rate hike in March and also in all likelihood provide the first details of its balance sheet normalisation . With the market having already priced in a lot and a strong pivot, the Fed will, as always, have to be careful not to give the markets jitters when the macro news flow is bearish and uncertainty about inflation remains very high.