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OUTLOOK 2023 Sec. OVERVIEW INFLATION: We will likely enter 2023 with GEOPOLITICS: Uncertainty surrounding the a slightly different trajectory for inflation, course of the Ukraine-Russia conflict has particularly services inflation. In recent thwarted diplomatic attempts to reach a months, durable goods prices have clearly negotiated settlement. The intense military decelerated—and in some cases, outright campaign involves a significant contribution declined—but services prices have been from NATO toward the Ukrainian war effort, stubbornly accelerating as rent prices and specifically from the U.S. Depending on health services rose. We could potentially how long the fighting continues, it is be entering a new regime as rents across the expected that many of the NATO countries, country are showing signs of abating. During including the U.S., may debate the financial this transition period for services prices, the burden. Markets historically have navigated coming year could be the time when inflation regional conflicts fairly well despite the ECONOMY: The global economy will likely is convincingly decelerating closer to the human toll. The largest market vulnerability slow from the upper-2% range in 2022 down Fed’s long-run target of 2%. remains the war’s impact on inflation. to the mid-1% range in 2023. Much depends on China's growth path. The divergence between domestic and international economies is most obvious in the inflation regime. Germany, for example, has still been STOCKS: If stocks are going to go higher in COMMODITIES: This year the global experiencing accelerating rates of inflation 2023, a prompt end to the Fed’s rate hiking economy adjusted to a higher interest rate in late 2022, whereas the U.S. has likely campaign will likely be a key component. campaign initiated by most central banks moved past the peak. The longer inflation The timing of the last rate hike of this cycle in order to tackle inflationary pressures. is uncontained, the riskier the growth is uncertain and won’t be clear for a while, As such, expectations are rising that several prospects. If the U.S. falls into a recession, but our view is that the Fed will pause during regions may face a recession or a significant chances are it would occur during the first early spring of 2023 amid an improving economic slowdown will unfold, which would half of 2023 and would likely not be as deep inflation outlook and loosening job market. weigh on demand. Unless there are severe as the 2008 recession, which was initiated by Should that occur, stocks would likely move shortages, commodity prices typically a fundamentally flawed financial market. higher, consistent with history. Stocks have tend to ease until there are signs that tended to produce solid gains after hiking central banks are nearing the end of the cycles end, including a 10% average gain rate hike cycle. one year later. BONDS: The path of interest rates will certainly be largely influenced by the Fed’s behavior, which will be guided by economic CURRENCIES: To say the U.S. dollar growth and inflation data. Equally important POLICY: The 2022 midterm election was closer has vaulted higher during the Fed’s rate is the level of non-U.S. developed government than many expected, but in the end voters hike cycle would be an understatement. bond yields, as foreign investors are an chose to rebalance the power dynamic in Whether it is the result of the interest rate important buyer of U.S. Treasuries. Higher Washington. As expected, Republicans gained differential (that is, that the Fed has been foreign market yields, all else equal, generally enough seats to win a narrow majority in the more aggressive than other central banks) dissuade foreign investment into our markets. House, while Democrats held on to their slim or that U.S. markets have been attracting There are a range of scenarios we think could majority in the Senate. Despite Republican’s more investments from foreign investors, play out over the next year. However, given narrow House majority, their victory in the the result has been staggering. The strong our view that the U.S. economy could eke out House significantly shifts the balance of dollar, while making imports less slightly positive economic growth next year, power, since only legislation with broad expensive, has put pressure on many we think 10-year Treasury yields could end bipartisan support will get passed once the of the large multinational companies with the year around 3.5%. new Congress is sworn in on January 3, 2023. a global footprint. Please see back cover for important disclosures. 02

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