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Macro outlook Macro outlook Job market resilience could prolong the late-cycle Investors may be surprised at the resilience of the global economy in 2023. Here, the Investment Solutions team discuss how the Fed’s desire to keep financial conditions tight means risk assets are not out of the woods. o far this year, the US Federal Reserve has raised Table 1 – US Labor Market Metrics to Monitor rates over six straight meetings by a total of 375 bps. Assuming the Fed follows through with an US Labor Market Metrics to Monitor Most recent data* End-2019 Difference expected 50 basis points hike in December, it will Unemployment rate (U3) 3.7% (Oct) 3.60% +0.10% Shave delivered the most cumulative tightening in Private Employment Cost Index: Wages and Salaries 5.3% (Q3) 3% +2.30% any calendar year since 1980. The speed and magnitude of Initial jobless claims 222K (Nov 12) 235K -13k rate hikes is, by design, weighing on the US economy in order to bring inflation down. Continuing jobless claims 1.5m (Nov 5) 1.9m -400k Prime-age employment to population ratio 79.8% (Oct) 80.30% -0.5% Evan Brown Ryan Primmer Amid this backdrop, over 75% of fund managers think a Aggregate labor income (YoY) 8.7% (Oct) 3.70% +5% Head of Multi- Head of Investment recession is likely over the next 12 months – a level roughly Private sector quits rate 2.9% (Sept) 2.60% +0.3% Asset Strategy Solutions on par with peak pessimism during the global financial crisis in 2009 and the COVID-19 pandemic in 2020¹. Source: Bureau of Labor Statistics, Department of Labor. *Now data: Unemployment rate as of October 2022, Private ECI as of September 30, 2022, Initial jobless claims as of Nov. 12, 2022, Continuing jobless claims as of November 5, 2022, Prime age employment to population ratio as of October 2022, Aggregate labor income as of October While a recession is a very real possibility, investors may be 2022, Private sector quits rate as of September 2022 surprised by the resilience of the global economy – even with such a sharp tightening in financial conditions. The labor market will certainly cool, but healthy household balance Table 2 – Developed market central banks’ key wage metrics sheets should continue to support spending in the services sector (Tables 1&2). Moreover, some of the major drags on the Central Bank Key Wage Metric %YoY Chg (Latest Reading) world economy emanating from Europe and China are poised Federal Reserve Private Employment Cost Index: Wages & Salaries +5.3% to get better, not worse, between now and the end of Q1 2023. (Q3) European Central Bank ECB Indicator of Negotiated Wages (Q2) +2.4% Avoiding a recession would clearly be good news; however, Bank of Japan Scheduled Contractual Earnings (Sept) +1.6% it would not signal an all-clear for risk assets. A more resilient economy may also mean central banks need to do more, not Bank of England Average Weekly Earnings Ex-Bonus/Arrears (Sept) +6.3% less, in order to get inflation durably back to target. And this Reserve Bank of Australia Wage Price Index Ex-Bonus (Q3) +3.1% raises the risks of a harder landing down the road. But, in our Reserve Bank of New Zealand Index of Salary & Wages (Q3) +3.9% view, it is too early to pre-position for very negative economic Bank of Canada BoC Common Wage Index (Q2) +3.3% outcomes. A longer-lasting late cycle environment can persist for some time, and investors will have to be flexible and Sources: US Bureau of Labor Statistics, European Central Bank, Japan Ministry of Health, Labour, and Welfare, UK Office for National Statistics, Australian Bureau of Statistics, discerning in 2023 given these potential dynamics. Statistics New Zealand, Bank of Canada ¹ Bank of America Global Research November 2022 Global Fund Manager Survey, 12 November 2022 2 3

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