A few moments ago, money markets began pricing in, with 100 per cent certainty, a half percentage point interest rate hike from the Federal Reserve next month. It seems certain that we’re in for the most aggressive global central bank tightening cycle in decades.

Data snaphot from Bloomberg:

And a prescient chartbook just dropped through from Citigroup global markets strategist Matt King, who tries to make sense of equities’ resilience in the face of all that expected tightening.

A consensus belief in “immaculate disinflation” isn’t supported by the data, he says: we’re as likely to get sticky inflation and transitory growth as the opposite.

On the question of what’s priced in, Citi advises to stop poring over rates markets and look instead at liquidity. Risk assets have consistently responded to money flows, which for equities had been trending lower long before real yields started rising. When it comes to equity flows and total returns, any resilience tends to be no more than a Wile E Coyote lag effect:

Citi’s research also offers a counterintuitive conclusion that quantitative easing pushed up long-term borrowing costs. Rather than suppressing rates, QE crowded money into risk assets and boosted inflation breakeven levels, it says.

Will quantitative tightening reverse the effect? We don’t know yet, because for the moment we’re still getting high on free money.

But there’s an economic rebound coming along to save us, right? Central banks are passing the baton to the private sector, where there’s a healthy pick-up in demand to borrow, right? Well . . . .

And how are US investors positioned for the coming storm? According to the sentiment data, they’re defensive. According to the flows data, they’re not. Absolute holdings of equities are back to record highs (chart one below) and household assets as a percentage of disposable income (chart two) have quite a tilt towards risk.

“People attribute risk assets’ resilience to strong fundamentals,” King concludes. “It’s because the tightening hasn’t started yet.”