Global Macro ISSUE 107 | March 14, 2022| 3:35 PM EDT

Research
&&&&&&T&&&&&

&&&& & & & &

TOPof
MIND STAGFLATION RISK
As 2022 continues to unfold, two major growth risks loom large against a backdrop
of alarmingly high inflation—the prospect of a Fed policy mistake, and of a sizable
disruption in the Euro area's energy flows. How policymakers navigate these risks,
and their growth and market consequences, are Top of Mind. On US policy risk, we
speak with Eric Rosengren, former President of the Boston Fed, and our own Jan
Hatzius, both of whom agree that policy-induced recession risk in the US has grown.
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

But Hatzius and GS’s David Mericle believe that fiscal policy poses the larger
recession risk today, and Mericle argues that a US recession would likely be mild.
On Euro area risk, we turn to BlackRock’s Philipp Hildebrand and GS’s Jari Stehn,
who also agree that the prospect of a sharp slowdown in Europe has risen dramatically, but that the ECB has no
choice but to press on with policy normalization given the inflationary backdrop, although Stehn anticipates a modest
delay. Finally, our strategists weigh in on what this all means for rates and the broader market.

“The last two recessions were induced by factors other

WHAT’S INSIDE
than monetary policy, but the risk of monetary policy being INTERVIEWS WITH:
the cause of the next recession has grown.
- Eric Rosengren
Eric Rosengren, Former President, Federal Reserve Bank of Boston

18ee3da7952d45efb4b53828771bcd9c
Central banks are set to deliver contractionary shocks to Philipp Hildebrand, Vice Chairman, BlackRock
an economy that's already set to disappoint. In such an
environment, there's heightened risk that central banks Jan Hatzius, Head of Global Investment Research and Chief
discover that they’ve pushed the economy below stall Economist, Goldman Sachs
speed.
Praveen Korapaty, Chief Interest Rates Strategist, Goldman Sachs
- Jan Hatzius
Q&A ON US RECESSION RISK
Stagflation risk is a real concern today… We are looking
David Mericle, GS US Economics Research
at a supply shock layered on top of a supply shock. And
the nature of the new supply shock—centered on EUROPE: A WAR-INDUCED RECESSION?
energy—suggests not only that inflation will move even
higher and likely prove more persistent moving forward,
but also that growth will take a hit.
“
- Philipp Hildebrand
Jari Stehn, GS Europe Economics Research

BETWEEN A ROCK AND A HARD PLACE

Dominic Wilson and Vickie Chang, GS Markets Research

...AND MORE
Allison Nathan | allison.nathan@gs.com Gabriel Lipton Galbraith | gabe.liptongalbraith@gs.com Jenny Grimberg | jenny.grimberg@gs.com

Investors should consider this report as only a single factor in making their investment decision. For
Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc.

 Top of Mind Issue 107

Macro news and views

El

We provide a brief snapshot on the most important economies for the global markets
US Japan
Latest GS proprietary datapoints/major changes in views Latest GS proprietary datapoints/major changes in views
• We recently lowered our 2022 Q4/Q4 GDP forecast to 1.75% • We recently lowered our CY22 growth forecast and raised
on higher oil prices and other conflict-related growth drags. our core CPI forecast to 1.5% and 1.5%, respectively, to
• We recently raised our YE22/23 core PCE inflation forecasts reflect sharply rising energy prices and our expectation of a
to 3.9% and 2.4%, respectively, due to increased risks of a conflict-induced global economic slowdown.
wage-price spiral, persistently firm shelter inflation, and less
Datapoints/trends we’re focused on
substantial durable goods inflation payback in the pipeline;
as a result, we raised our 2023 Fed baseline to four 25bp • Core CPI inflation, which looks increasingly likely to top 2%
hikes and our terminal funds rate estimate to 2.75-3%. temporarily in late 2022 due to higher commodity prices, yen
Datapoints/trends we’re focused on depreciation, and the drop out of special factors.
• Russia risk; we see upside risk to our inflation forecasts and • Yield curve control, which we expect the BOJ to maintain
downside risk to our growth forecasts from the conflict. through at least April 2023.

A higher US inflation path Japanese inflation: above 2%, if only temporarily

Contributions to yoy core PCE inflation, % change, year ago Core CPI and New Core CPI forecast, % yoy
6 GS Forecast 2.5
Supply-Constrained Durable Goods Core CPI Forecast
Other Goods
5 Travel 2 Consensus
Other Services
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

1.5 New Core CPI

4 Shelter
Core PCE
1
3
0.5
2
0
1
-0.5
0
-1
-1
-1.5
01/18 10/18 07/19 04/20 01/21 10/21 07/22 04/23 01/24
03/18 12/18 09/19 06/20 03/21 12/21 09/22 06/23
Source: Goldman Sachs GIR. Source: Ministry of Internal Affairs and Communications, JCER, GS GIR.

Europe Emerging Markets (EM)

Latest GS proprietary datapoints/major changes in views Latest GS proprietary datapoints/major changes in views
• We recently lowered our 2022 Euro area and UK GDP • We lowered our 2022 Russia GDP forecast to -7% following
forecasts by 1.4pp to 2.5% and by 0.9pp to 3.8%, the imposition of the latest round of G7 sanctions.
respectively, as the economic fall-out from the war in • We recently lowered our 2022 CEEMEA growth forecast

18ee3da7952d45efb4b53828771bcd9c
Ukraine has grown as the conflict has escalated. and raised our inflation forecast to 0.3% and 23.3%,
• We recently pushed back our expectations for ECB and BoE respectively, in light of the Russia-Ukraine conflict.
• We recently lowered our CY22 India GDP forecast to 8.3%
policy normalization due to the conflict, and now expect the
in light of the conflict.
ECB to end net APP purchases in Sept and lift off in Dec
Datapoints/trends we’re focused on
2022 and the BoE to pause rate hikes in May. • China Covid restrictions; in the midst of the worst outbreak
Datapoints/trends we’re focused on since Wuhan in early 2020, we expect policymakers to
• Fiscal policy; we expect additional fiscal measures in the maintain significant Covid restrictions for most of 2022.
EMU-4 and UK due to the conflict-induced growth shock. • Global FCI, which is at its tightest levels since May 2009.
A significant Euro area growth hit Financial conditions have tightened substantially
2022 Euro area growth downgrade, pp Global Financial Conditions Index (FCI), nominal
105

104

103 Tightening

102

101

2022 Downgrade: 1.4pp 100

99 Easing

98
03/07 09/08 03/10 09/11 03/13 09/14 03/16 09/17 03/19 09/20
Source: Goldman Sachs GIR. Source: Goldman Sachs GIR.

Goldman Sachs Global Investment Research 2

 Top of Mind Issue 107

Stagflation Risk
El

As 2022 continues to unfold, two major growth risks loom large from the Russia-Ukraine conflict, and the implications of a
against a backdrop of alarmingly high inflation. The first risk, stagflationary environment for ECB policy normalization.
centered in the US, is the prospect of a policy mistake as the Hildebrand believes that stagflation risks in the Euro area have
Fed embarks on a tightening cycle to rein in inflation, which grown sharply in recent weeks as the conflict-induced supply
was already running at multi-decade highs before the tragic shock comes on top of the pandemic-induced supply shock
Russia-Ukraine conflict delivered a sizable commodity supply already in train, likely resulting in even higher, and, importantly,
shock. Whether the Fed will be able to pull off a soft landing in more persistent, inflation at the same time that the economy is
such a challenging macro environment—or will instead end up facing a large hit to growth. Despite this risk, he says, the ECB,
triggering a recession—is a growing question. The second risk, as well as the Fed, have no choice but to press forward with
centered in Europe, is the prospect that the Russia-Ukraine policy normalization given the most dangerous risk today: the
conflict deals a crippling economic blow given Europe’s potential de-anchoring of inflation expectations.
dependence on Russian energy, which could see Europe
Stehn agrees that growth risks have grown dramatically in the
experience a stagflationary period of persistently higher
Euro area, and now expects negative growth in Q2 and only
inflation and low (or even negative) growth. How US and
2.5% growth in 2022, with a downside scenario suggesting a
European policymakers navigate these risks, and their growth
technical recession this year. While he agrees with Hildebrand
and market consequences, are Top of Mind.
that the ECB will proceed with tightening, he now sees the first
We start by speaking with Eric Rosengren, former President of ECB rate hike only in December (vs. September previously).
the Federal Reserve Bank of Boston, and Jan Hatzius, GS Head
Beyond these economic projections that suggest a higher risk
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

of Global Investment Research and Chief Economist, who

of recession in the US and especially Europe, is the market
agree that the risk of a monetary policy-induced recession in
itself signaling a recession ahead? Much has been made of the
the US has risen. Rosengren argues that by not pivoting earlier
recent flattening and mild inversion in the US yield curve—
to address inflation, the Fed made a policy mistake that has left
historically, a relatively reliable indicator of recession risk. That
it behind the curve. This, he says, raises the risk that it will now
said, Praveen Korapaty, GS Chief Interest Rates Strategist, is
have to move faster to bring down inflation, and the faster it
currently skeptical about the value of the signal from an
moves, the greater the likelihood that its actions cause a
inverted curve, given his view that a global duration
recession. For now, he expects 25bp rate hikes throughout the
supply/demand imbalance is depressing long-end yields, which
year, and advocates for a greater reliance on shrinking the
could cause the curve to invert early in the cycle.
balance sheet to achieve the tightening needed to address
current inflationary pressures. But he believes that uncertainty In Korapaty’s view, 10y UST yields will continue to move
around the Russia-Ukraine conflict, as well as around Covid, directionally higher to 2.25% by YE22, consistent with Hatzius’
could complicate the Fed’s decision-making process—and its and Mericle’s expectation that the Fed won’t tighten materially
ability to achieve a soft landing—in the second half of the year. less given the inflation backdrop. And, while he believes that
the stickiness in long-end yields will likely persist for a while, he
Hatzius, for his part, argues that the risk of a recession over the
sees market pricing of terminal rates in the 1.75-2% range—
next one to two years has increased as the Fed is set to deliver
which would mean less restrictive real rates than in the last

18ee3da7952d45efb4b53828771bcd9c
contractionary shocks to an economy that was already likely to
cycle—as too low—and Rosengren and Hatzius agree.
disappoint even before the growth-negative geopolitical conflict
began. For now, he’s also sticking with his view that the Fed For his part, Hildebrand doesn’t see significant upside for
will deliver consecutive 25bps hikes this year—with balance terminal rates from current market levels, expecting them to
sheet shrinkage running in the background—given that inflation reach about half the level that they would in a normal cycle.
concerns are more pressing than growth concerns in the US. That’s because he believes that, given the mostly supply side-
But he believes that the recent geopolitical tensions have tilted nature of the current inflation surge, the amount of rate hikes
the balance of risk around the Fed’s actions to the dovish side, required to sharply reduce inflation would “absolutely kill” the
by raising the risk of a large tightening in financial conditions, economy. And in an environment in which growth is already
which could compel the Fed to pump the brakes. slowing, central banks choosing to take such a path strikes him
as an impossibility. So the end result will be fewer rate hikes,
David Mericle, GS Chief US Economist, then answers the most
and central banks ultimately learning to live with higher inflation.
oft-asked questions about US recession risk, concluding that
the drag from fiscal policy poses a larger risk to US growth this GS market strategists Dominic Wilson and Vickie Chang then
year than monetary policy, and that the direct effects of the look at how broader market pricing has changed as conflict-
war in Ukraine would not be big enough to push the US into related growth risks have taken over the driver’s seat from
recession, but an associated tightening in financial conditions monetary policy risks. They conclude that while the market has
and deterioration in consumer and business sentiment could. largely priced in our central growth scenarios at this point, risky
So he sees higher risk of a recession this year relative to a assets will likely struggle to perform until the prospect of a
normal year. That said, he believes that the scenarios he lays more severe downside scenario abates.
out would likely imply only a mild recession, and the related
rise in unemployment would be below that of most recessions. Allison Nathan, Editor
Email: allison.nathan@gs.com
We then turn to Philipp Hildebrand, Vice Chairman of Tel: 212-357-7504
BlackRock, and GS Chief European Economist Jari Stehn, to Goldman Sachs & Co. LLC
gauge the risks of a Euro area recession amid the growth shock

Goldman Sachs Global Investment Research 3

 Top of Mind Issue 107

Interview with Eric S. Rosengren

El

Eric Rosengren is the former President of the Federal Reserve Bank of Boston, serving from
2007-2021, before which he served in various roles at the Bank since 1985. He is currently a
visiting professor at MIT. Below, he argues that the Fed is behind the curve in addressing
inflation and that the risk of monetary policy causing the next recession has grown as a result.
The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.

Allison Nathan: You served at the said, I'm not particularly concerned about a wage-price spiral,
Fed for over three decades. Why because I think the Fed will tighten enough to prevent one.
was it caught so off guard by the
Allison Nathan: With the benefit of hindsight, was 2020 the
current surge in inflation?
wrong time to implement a new framework that rejects
Eric Rosengren: Economists look at pre-emptive strikes on inflation in pursuit of the Fed’s
historical data to help forecast the maximum employment goal?
future. And when something happens
Eric Rosengren: I don’t fault the framework—it was introduced
that’s not in the historical data, the
to address the problem that had prevailed for the previous two
ability to predict what's going to
decades, which was getting inflation up to 2%, and we couldn’t
happen next becomes much more difficult. We don't have any
have anticipated the pandemic and its economic
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

instance of a serious pandemic in the post-war data, and many

consequences. But being too reliant on any framework is a
econometric models focus on the period from the mid-1980s.
problem. For that reason, I viewed the framework more as a
As a result, a fair amount of uncertainty about how a pandemic
communication tool rather than a straitjacket on Fed action. But
would play out is to be expected. This is especially the case
my guess is that many people viewed it as more of a promise
since Covid isn’t really one pandemic, but multiple, considering
and less of a communications guide. And anytime something
the various variants that are hitting different countries at
that is viewed as a rule encounters an unexpected
different times.
development that wasn't used to calibrate the rule, you run the
While the serial oil supply shocks of the 1970s provide risk of a problem. That's exactly what the Fed encountered
somewhat of a parallel in that they represented a substantial during the pandemic.
supply shock that proved challenging for both the economy and
Allison Nathan: So do you expect the Fed to conduct policy
policymakers, exactly how such a shock stemming from a
with greater flexibility going forward?
public health crisis would manifest itself was understandably
unclear; for example, nobody expected that the surge in used Eric Rosengren: The Fed obviously pivoted and is moving
car prices would persist as long as it has. And conditions more more quickly, but policymakers will likely still be concerned
broadly are very different now relative to the 1970s. The about throwing the economy into a recession, especially given
amount of leverage in the system and financial innovations like the recent geopolitical developments. So the Fed is likely to

18ee3da7952d45efb4b53828771bcd9c
cryptocurrencies and other alternative assets have increased remain relatively cautious and to continue to move somewhat
financial stability concerns. The last two recessions have consistently with the framework to achieve inflation much
effectively seen runs on money market funds that threatened closer to the target without disrupting the labor market much.
short-term credit markets. So, the institutional situation today is
Allison Nathan: The market is pricing a little less than seven
very distinct and more complex from the situation that Paul
Fed hikes this year. Does that seem about right to you?
Volcker faced when he implemented a sharp hawkish pivot to
rein in the high inflation of the 1970s. But just because it's a Eric Rosengren: I expect that the Fed will raise rates by 25bp
more difficult situation, policy still needs to focus on improving throughout the year unless the economy slows down more
economic outcomes. than they anticipate. If the current geopolitical situation deals a
severe shock to the economy, that obviously makes what to do
Allison Nathan: Even with the recent hawkish pivot, are
a more difficult call. In general, I'd be surprised if the Fed
you concerned that the Fed remains behind the curve, and
moved in 50bp increments, because if you start moving that
that the economy could end up in a wage-price spiral?
quickly, you start worrying that you don't have enough time to
Eric Rosengren: The Fed is definitely behind the curve. analyze how the previous hikes are impacting the economy. So,
Inflation is well above 2% both in PCE and CPI terms. The if policymakers get to the point where they're in effect
unemployment rate is at 4%, which is below the CBO’s panicking, which a series of 50bp hikes would suggest, that
estimate of full employment. In such an environment, interest would risk undoing all of the gains achieved in the labor
rates should be a little above neutral, which is likely market—the other side of the dual mandate that the Fed can’t
somewhere above 2%. We're pretty far away from that point, ignore—and would significantly raise the probability of a
so the Fed has a lot of room to catch up. If any mistake was recession in the next two years in my own forecast.
made, it was not pivoting earlier. While it was reasonable to
Allison Nathan: Can raising interest rates really be effective
assume that the inflation surge would be temporary in March
in stemming inflation that is driven by supply constraints?
and April of last year, as we got into late spring and the
summer, ideally the Fed would've started to pivot so that it Eric Rosengren: Raising rates obviously does nothing to
wouldn’t have had to shift as abruptly as it has this year. All that increase supply, but the core problem is that demand is greater

Goldman Sachs Global Investment Research 4

 Top of Mind Issue 107

El

than supply. And raising rates will reduce demand as fewer Allison Nathan: Market volatility has surged in response to
people buy homes, cars, and other goods and services. So inflation concerns, augmented by the recent geopolitical
there's no magic to slowing down the inflation rate—you just developments. Is there a point at which market volatility
need demand to slow down enough so that the amount of would prompt the Fed to alter its course?
goods being produced is roughly equal to the amount that
Eric Rosengren: The Fed considers all economic variables as
people want to purchase. But that’s difficult to predict when
well as what's happening in financial markets, and their goal is
the world is so uncertain, which is why the Fed would want to
to avoid unnecessarily disrupting financial markets. Ideally,
move somewhat cautiously.
financial markets and the Fed are on the same page and the
Allison Nathan: What’s your view on the use of other tools, Fed’s policies are well explained so that the markets don’t have
like shrinking the balance sheet, in reining in inflation? a widely different view than the Fed, which runs the risk of a
more disruptive movement in financial markets than is optimal.
Eric Rosengren: I personally have a less traditional perspective
on balance sheet management that may not be reflective of Allison Nathan: The market is currently pricing a terminal
how the Fed is thinking about it. The last time that the Fed rate of 1.75-2%—is it right to think that the terminal rate in
normalized policy, it primarily relied on raising the Fed funds this cycle will be lower than in the last cycle?
rate. But if the problem today is that supply can't keep up with
Eric Rosengren: That would not be my best guess for the
the demand for goods like houses and cars that consumers
terminal rate. Settling at that rate would imply that the
purchase using longer-term financing, targeting long-term rates
economy doesn’t have a more persistent inflation problem and
through the balance sheet, rather than short-term rates through
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

that inflation will return to its 2% target relatively quickly. This

the Fed funds rate, may be more effective in containing
assumes that the pandemic has not altered inflation
inflation. 10y UST yields around 2% don’t do much to slow the
expectations that are well-anchored at 2%. Even if that’s true,
demand for houses and cars. So if the Fed is serious about
you'd probably expect an equilibrium rate higher than that. And
slowing down the economy to address inflation, a greater role
if we assume that inflation will take longer to come down to
for balance sheet reduction in the Fed’s exit strategy would
target, real rates would need to be high enough to slow the
make sense, especially given the large weight of goods like
economy to rein in inflation, and negative real rates won’t do
cars and shelter in the CPI.
much to achieve that. The terminal rate certainly needs to be
Using the balance sheet versus the Fed funds rate also has higher than the inflation target, but how much higher will
important implications for credit availability that deserve depend on how difficult it is to temper inflation, and other
consideration. Since financial intermediaries borrow at the short factors affecting the economy, including fiscal policy and the
end and lend at the long end, rapid increases in short-term global market backdrop.
rates flatten the yield curve and reduce the incentive for
Allison Nathan: Given all that, what's the risk that the Fed
financial intermediaries to lend, with low- and moderate-income
can't engineer the soft landing it wants to at this point,
borrowers most likely to suffer reduced access to credit. If and what are you watching to assess that?
tightening is instead implemented through balance sheet
shrinkage, that would steepen the yield curve and increase the Eric Rosengren: The faster the Fed has to raise rates to rein in

18ee3da7952d45efb4b53828771bcd9c
attractiveness of lending, so you don’t have the same issue inflation, the more unpredictable the outcome and the more
with credit availability. So I would personally favor doing more likely that its actions cause a recession. If we find that
with the balance sheet and less with the Fed funds rate, structural changes in the labor market following the pandemic
although I am not sure the Fed is willing to do so. or other factors outside of our historical experience require very
rapid rate hikes to reduce inflation, then the probability of a
Allison Nathan: Is there a case for actively selling
recession would rise quite dramatically. I am closely watching
Treasuries or mortgages this time around?
labor markets—indicators like initial claims, new hires, as well
Eric Rosengren: My personal preference would be to try to as wages and salaries, which have been rapidly rising relative to
maintain a positive slope to the yield curve, and if that requires productivity. If that were to continue, and higher wages
selling Treasuries and mortgages, then that's what the Fed become embedded in the labor market, I would worry that
should do. So, these balance sheet options should be on the inflation might settle at a rate much higher than the Fed’s
table, and, again, the Fed should seriously consider trying to do target, requiring more aggressive action that might ultimately
a bit less with the Fed funds rate and a bit more with the lead to a larger slowdown in the labor market than is desirable.
balance sheet, which is very large relative to history.
I am not concerned that the first set of rate hikes will be
Allison Nathan: Are there other unconventional tools that problematic in this sense, but the second half of 2022 looks
the Fed should consider employing? trickier given the uncertainty surrounding the Russia-Ukraine
crisis, oil prices, and the prospect of new virus variants. So I
Eric Rosengren: I'm not sure the Fed needs more tools at this
think it's pretty unpredictable at this stage, but the faster the
stage. Unconventional tools are usually rolled out during crises,
Fed moves, the greater the risk. And I would say that the risk of
when the Fed needs to get into problematic niches of the
a monetary policy-induced recession is more elevated now than
market. Today’s situation of excess demand relative to supply
it has been in quite a long time. The last two recessions were
is a very different problem. And for that, focusing on a handful
induced by factors other than monetary policy, but the risk of
of tools probably makes more sense than trying to develop new
monetary policy being the cause of the next recession has
tools. The Fed funds rate and balance sheet management will
grown.
likely be sufficient to address today’s inflation concerns.
Goldman Sachs Global Investment Research 5
 Top of Mind Issue 107

Interview with Jan Hatzius

El

Jan Hatzius is Head of Global Investment Research and Chief Economist at Goldman Sachs.
Below, he argues that the Fed will likely stay the course and deliver seven 25bp hikes despite
the Russia-Ukraine shock, and that, while not his base case, the risk of a policy mistake and
recession have risen given recent upside inflation surprises, especially strong wage growth.
Allison Nathan: With inflation growth hasn't picked up significantly, and the labor market isn't
already running at multi-decade overheating to the same extent. In fact, despite the Euro area
highs, how has the Russia-Ukraine unemployment rate dropping to a record low in January, we
conflict—which could exacerbate still think there's some remaining labor market slack. So, we
current inflationary pressures while continue to expect the ECB to raise rates somewhat later and
also weighing on growth— more gradually than the Fed, and look for a 25bp rate hike in
impacted your expectations for December. That said, while it’s not our base case, a downside
central bank policy? scenario in which Russian energy exports are banned would
Jan Hatzius: It hasn’t impacted my entail a sizable 2.2pp hit to production, and in such a scenario
we would expect a technical recession in the Euro area this
expectations much. While it's a massive shock in terms of
year.
military and security issues, and horrible on a human level, the
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

impact of the ongoing conflict on the global economy will likely Allison Nathan: Last time we spoke, you argued that US
be more limited, barring a severe escalation. There are a few inflation would gradually subside this year on the back of a
key spillover channels to monitor. First, there's the weight of normalization in the prices of supply-constrained goods.
the Russian and Ukrainian economies in global GDP and their How have your inflation expectations changed since then?
trade with the rest of the world, both of which aren't
Jan Hatzius: We still expect significant payback from the
particularly large. Second, there's Europe's substantial
normalization of prices in these categories, albeit somewhat
dependence on Russian energy supplies, which could lead to a
less pronounced and a little bit later than we originally
more sizable impact on Euro area GDP if Russian gas stops
anticipated. In particular, we expect the contribution of supply-
flowing and that forces a shutdown of industrial output to keep
constrained categories to core PCE inflation to swing from
European houses warm. Third, there's the effect of tightening
about 155bp year-on-year to -5bp by end-2022 and -45bp by
financial conditions as global markets continue to adjust, which
end-2023. But that's working against the acceleration in the
looks moderate outside of Russia so far. And fourth, there's the
more trending components of inflation—such as shelter and
broader impact to energy and commodity supplies, which has
other core services—and second round effects working
already led to a surge in commodity prices and has
primarily through wages. Wages are growing at a rapid pace of
consequences for global inflation and growth.
roughly 6% quarter-on-quarter annualized. That should come
Taken together, the conflict is a stagflationary shock in the down gradually as the post-Covid labor market reset continues

18ee3da7952d45efb4b53828771bcd9c
sense that it both hits growth and boosts inflation, which have to play out, but nominal wage growth will likely still be 5% at
somewhat offsetting implications for Fed policy. So, despite the end of the year given how scarce workers are relative to
being growth negative directionally, the conflict shouldn't push the number of available jobs, which implies unit labor cost
central banks to do materially less than they otherwise would growth of 3-3.5% after netting out 1.5-2% productivity growth.
have given the inflation backdrop. US inflation, in particular, is This should all leave core PCE inflation at 3.9% by end-2022,
extremely high relative to history, and so we expect seven which is clearly too high from the Fed's perspective.
25bp Fed hikes this year, or 175bps of rate increases, and four
Allison Nathan: Does the recent sharp wage growth raise
25bp hikes in 2023.
the risk of a wage-price spiral?

Jan Hatzius: Yes. The labor market looks far more overheated
Despite being growth negative than I expected 6-12 months ago, especially based on the gap
directionally, the [Russia-Ukraine] conflict between available jobs and workers. This is a useful indicator
because it doesn't rely on any statistical estimates like the
shouldn't push central banks to do materially unemployment gap, which is the unemployment rate relative to
less than they otherwise would have given the natural rate of unemployment, but rather compares the
the inflation backdrop.” total number of available jobs based on employment plus open
positions relative to the number of workers in the labor force,
Allison Nathan: Does the calculus change for the ECB, and has been a strong predictor of wage growth over the last
though, given that Europe is more exposed to the conflict several decades. Today, jobs outnumber workers by the largest
both in terms of growth and inflation? margin since the end of World War II. One reassuring factor is
Jan Hatzius: The shock is far bigger for Europe, and the ECB is that long-term, forward inflation expectations measures—
also starting from a different place. Rates are still negative in whether focusing on households, market participants, or
the Euro area, and while inflation has also surprised forecasters—aren't yet showing signs of a de-anchoring. But
substantially to the upside, it's more debatable how entrenched it's hard to know how much weight to put on that because
inflation actually is in the Euro area compared to the US. Wage forward expectations haven’t been observable in many past

Goldman Sachs Global Investment Research 6

 Top of Mind Issue 107

El

cycles. And, in the end, it’s clear that the labor market is experience with balance sheet operations, doesn’t, to me,
substantially overheated. Despite a remaining shortfall of suggest a strong argument for greater use of the balance sheet
2.2mn jobs relative to the pre-pandemic level, there still aren't in the exit strategy.
enough workers to fill the ample amount of open positions
Allison Nathan: Does it make sense that the market is
today, and that raises the risk of a wage-price spiral.
currently pricing a lower terminal rate than in the last
Allison Nathan: Given the rising risk of a wage-price spiral, cycle?
is the balance of risk leaning towards the Fed having to
Jan Hatzius: It’s always important to remember that markets
hike more aggressively than you currently expect?
price the probabilities of a range of scenarios rather than a
Jan Hatzius: There are certainly some significant upside risks. single path. With that caveat, though, the market is putting a
The Fed funds rate still at zero, inflation far above target, and higher weight than I think is appropriate on the prospect of a
risk of a wage-price spiral and a de-anchoring of inflation long-term, zero-rate outcome where the Fed is forced into a
expectations all suggest that the Fed could need to move more policy reversal and has to cut rates. Current market pricing
aggressively at some point, and potentially in 50bp increments. suggests a terminal rate of 1.75-2% vs. our expectation for
2.75-3% by end-2023. I find it hard to write down a reasonable
On balance, though, I think the downside risks are even more
range of scenarios that would justify such a low probability-
significant, in part because of the massive escalation in
weighted average.
geopolitical tensions and the surge in commodity prices. If
financial conditions tighten more significantly, say by 100- Allison Nathan: But has the risk of a policy mistake that
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

200bp relative to the 125bp since last year, then it's possible eventually forces such a reversal increased?
that the Fed could take a pause. In the end, the Fed wants to
Jan Hatzius: Yes. Our baseline remains a soft landing, with the
tighten financial conditions enough to get growth to a trend or
view that the significant increase in the funds rate that we
slightly below-trend pace without sparking a recession. They
expect should help slow growth to a roughly trend pace of 2%
don't believe that the economy needs a recession in order to
in 2H23 and then slightly below 2% beyond 2023, and that
break the current inflationary dynamics, although that could
more people will return to the workforce as health fears
become a reasonable expectation at some point. So, a large
dissipate and financial cushions expire, reducing the current
tightening in financial conditions could compel the Fed to hit
overheating in the labor market. But the risk of a policy mistake
the brakes on rate hikes.
has increased as the environment has become harder to
Allison Nathan: To what extent do you expect balance predict. The magnitude of uncertainty around many of the
sheet shrinkage to contribute to the policy tightening, and shocks we're dealing with today are very large. Geopolitical
should the Fed consider a larger role for the balance sheet uncertainty will be negative for growth and positive for inflation,
in its exit strategy given the nature of the current inflation but the extent of the impact is less clear. The US will
pressures? experience a sizable fiscal drag this year, even when
accounting for pent-up savings, as many of the pandemic-era
Jan Hatzius: Our baseline is that the Fed will announce the
stimulus programs end, but whether that will be a one or three
start of balance sheet reduction in June, and will let Treasuries

18ee3da7952d45efb4b53828771bcd9c
percentage point hit to growth is harder to gauge. In this
and mortgage-backed securities run off with caps of $60bn and
environment, the risk that Fed policy isn’t well-calibrated has no
$40bn per month, respectively. That implies that the Fed's
doubt risen.
balance sheet will shrink by roughly $2.5-$3tn over the next
three years. Our best estimate for the impact on the term Allison Nathan: So has the risk of a recession also risen?
premium and thus long-term interest rates is about 30bp. From
Jan Hatzius: Yes, the risk of a recession at some point in the
an economic activity perspective, we think this is equivalent to
next year or two has also increased. Central banks are set to
about a 30bp hike in the funds rate, or about one-tenth of the
deliver contractionary shocks to an economy that's already set
impact of the 11 hikes we now expect through end-2023. So
to disappoint. In such an environment, there's heightened risk
we expect the impact of quantitative tightening (QT) on the
that central banks discover that they’ve pushed the economy
economy to be fairly limited. That said, the confidence interval
below stall speed and become victim to the three-tenths rule,
around the impact of QT is much larger than an actual hike in
whereby increases in the unemployment rate of more than
the funds rate because there's less of a track record with the
three-tenths of a percentage point from its trough have
effects of QT.
historically led to recession—a trend that's very clear in the US
Although the long-end of the yield curve that balance sheet data and to a lesser degree in other advanced economies.
management targets is more directly tied to the economy than Relative to six months ago, when the prospect of another
the short-end in some ways, given that consumers finance adverse Covid shock was my main concern, the risk of
bigger-ticket items with longer-term borrowing and 10y generating a more traditional recession through the interaction
Treasuries are a significant weight in our financial conditions of central bank policy, financial markets, and growth has risen.
index (FCI), the most clearly overheated part of the economy I'm not sure whether that risk is now bigger than the risk of
right now is the labor market, which isn’t disproportionately another Covid-induced downturn, but it's certainly a real risk.
tied to longer-end rates. That, combined with the Fed’s lack of

Goldman Sachs Global Investment Research 7

 Top of Mind Issue 107

Q&A on US recession risk

El

that every $10/bbl increase in oil prices reduces US GDP

David Mericle answers key questions about growth by 0.1pp, and every 1pp decline in European growth
the risk of a US recession over the next year reduces US growth by 0.05pp via the export channel. Higher
food and other commodity prices could weigh on growth
Q: Does the market expect a recession? further, but these effects are unlikely to push US growth below
1-1.5%, even if trade with Russia is more fully disrupted. For
A: Traditional market indicators of recession risk are sending the war to spark a recession in the US, it would also need to
conflicting messages. Models based on the slope of the yield cause a large tightening in US financial conditions and a
curve imply recession odds of 20-35% over the next year, deterioration in consumer and business sentiment. While that
above the 15% unconditional historical odds of a recession in is not our base case, it’s not impossible, especially if Europe—
any four-quarter period. We have reservations about these which is much more exposed to Russian energy exports—were
models, but those yield curve-implied odds of recession seem to fall into recession first.
reasonable to us. In contrast, credit market signals like the
excess bond premium imply much lower recessions odds of Lower growth due to higher oil prices and the war in Ukraine
just over 10% this year. Real GDP growth, % change, annual rate
7
The yield curve implies ~20-35% odds of a US recession Actual
over the next year 6 GS Forecast
Consensus
Market-implied odds of a recession in the next 12 months, %
5
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

10y2y
100
4
10y3m
80 3
Excess
Bond Premium 2
60
GS Potential Growth Estimate
1
40
0
Mar-21 Jul-21 Nov-21 Mar-22 Jul-22 Nov-22
20
Source: Bureau of Economic Analysis, Bloomberg, Goldman Sachs GIR.

0 Q: Will the Fed cause a US recession?

1976 1981 1986 1991 1996 2001 2006 2011 2016 2021
A: We worry more about the growth effects from fiscal than
Source: Bloomberg, Goldman Sachs GIR.
monetary policy tightening, both because the size of the fiscal
Q: How worried are you about a US recession this year? drag on growth is larger, and because the Fed would likely
recalibrate policy tightening if the economy threatened to fall
A: We started the year with a well below-consensus US GDP
into recession. Fed officials have certainly not concluded that a

18ee3da7952d45efb4b53828771bcd9c
growth forecast because we expected reduced fiscal support
recession is necessary to bring down inflation.
to pose a major headwind to growth. Following the recent rise
in oil prices on the war in Ukraine, we recently cut our 2022 That said, the risk of accidentally overtightening is probably
Q4/Q4 forecast to 1.75% (vs 2.4% at the beginning of the year) higher than in the last cycle, when the Fed was very quick to
which we estimate is the economy’s longer-run potential back off when downside risks emerged or financial conditions
growth rate. tightened significantly. Today, the Fed has a much more urgent
need to fight inflation than it did in the last cycle, and the bar
The risk of a US recession this year has always looked higher
for it to stop hiking will be higher. During the last cycle we
than in an average year to us because there is more uncertainty
argued that a tight labor market posed less recession risk than
about the key drivers of the growth outlook, which increases
it had historically because the anchoring of inflation
tail risks in both directions. We see economic growth this year
expectations and the flattening of the Phillips curve meant that
as a battle between fiscal drag and what will hopefully be large
the Fed didn’t have to tighten as aggressively to prevent
boosts from further service sector reopening and spending of
inflationary overheating. Today, with some signs of at least a
excess savings. The uncertainty is high both because the
moderate wage-price spiral emerging, that’s much less clear.
magnitude of these forces is huge—we estimate that reduced
fiscal support will be a 4pp drag on growth, whereas risks in Q: How bad might a potential US recession be?
the last cycle like the US-China trade war were measured in
A: Any of the above scenarios would probably imply only a mild
tenths of a percentage point—and because there is little recent
recession because the US economy does not have major
precedent on which to base estimates of factors like the
imbalances that need to unwind. Moreover, with labor demand
excess savings effect. Two other risks also raise the odds of
starting at an extremely high level, we would probably see
recession this year relative to a normal year: the possibility of a
much less of an increase in unemployment than in most
harmful new virus variant emerging, and the war in Ukraine.
recessions.
Q: Could the war in Ukraine cause a US recession?
David Mericle, Chief US Economist
A: The direct effects of the war are probably not enough to Email: david.mericle@gs.com Goldman Sachs & Co. LLC
push the US economy into recession. Our rules of thumb are Tel: 212-357-2619

Goldman Sachs Global Investment Research 8

 For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

What will cause the next US recession—according to the media and Twitter
Key terms associated with causes/drivers of the next US recession, based on financial news articles or tweets published year-to-date

Interest

Yields
Price Back
Supply
Shot Back
Federal Demand
Treasury Policy
Bonds Raise Inflation Fed
Raising Interest
Risk Reserve Money
Inverted High
Strongest Long
Hike
Economy Inflation Biden

Rates Downturn Global

Rates
Prices
Fed Economic Oil
Raising Hikes
Raise
Rate War
Economy Energy
Fears Russia

Aggressively
Size of the bubble/text represents
Economic
relative frequency of the term in search results
Press Twitter

Source: Primer (news data), Brandwatch (twitter data). Special thanks to Jeffrey Luo, Dan Duggan, and Carl Cederholm.

18ee3da7952d45efb4b53828771bcd9c
 Top of Mind Issue 107

Fed hiking cycles: hard & soft landings

El

The Fed has a somewhat mixed track record of delivering perfect soft landings (i.e., no quarters of economic contraction)
Tightening period Change in RFF (bps) NBER first recession month Real GDP drop Policy-induced recession?
Sep. 1965 - Nov. 1966 175 -- None No
July 1967 - Aug. 1969 540 Jan-70 -0.6% Soft-ish landing
Feb. 1972 - July 1974 960 Dec-73 -2.7% Hard landing
Jan. 1977 - Apr. 1980 1300 Feb-80 -2.2% Hard landing
July 1980 - Jan. 1981 1000 Aug-81 -2.1% Hard landing
Feb. 1983 - Aug. 1984 315 -- None No
Mar. 1988 - Apr. 1989 325 Aug-90 -1.4% Soft-ish landing
Dec. 1993 - Apr. 1995 310 -- None No
Jan. 1999 - July 2000 190 Apr-01 -0.1% Soft-ish landing
June 2004 - June 2006 425 Jan-08 -3.8% Policy not main recession driver
Oct. 2015 - Jan. 2019 225 Mar-20 -10.1% Policy not main recession driver
Mar. 2022 - ? ? -- -- ?
Source: "Landings Hard and Soft: The Fed, 1965-2020" Alan Blinder (2022), Goldman Sachs GIR.

The coming tightening cycle will begin with interest rates at historically low levels...
Fed funds effective rate, % pa
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

25
Fed hiking cycle
followed by a
recession
20 Fed hiking cycle
followed by limited
economic contraction
("Soft-ish landing")
Fed hiking cycle not
15 followed by a
recession
Fed policy not main
recession driver
10 *Diamonds reflect
peak of Fed hiking
cycles
(gray shading =
periods of recession)
5

18ee3da7952d45efb4b53828771bcd9c
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: "Landings Hard and Soft: The Fed, 1965-2020" Alan Blinder (2022), Goldman Sachs GIR.

…and with inflation more elevated than any time since the 1970s
Headline CPI inflation, % yoy

16
*Diamonds reflect peak of Fed hiking cycles Fed hiking cycle
14 (gray shading = periods of recession) followed by a
recession
Fed hiking cycle
12 followed by limited
economic contraction
10 ("Soft-ish landing")
Fed hiking cycle not
8 followed by a
recession
Fed policy not main
6 recession driver

-2

-4
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: "Landings Hard and Soft: The Fed, 1965-2020" Alan Blinder (2022), Goldman Sachs GIR.

Goldman Sachs Global Investment Research 10

 For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

El
Interest Rate Policy Balance Sheet Policy Outlook
Top of Mind

• We forecast seven 25bp rate hikes in 2022, starting in March, and

Federal funds rate: 0.00-0.25% • Started reducing the monthly pace of its net asset four quarterly hikes in 2023. We forecast a terminal funds rate of
Last changed March 2020 (-100bp), purchases in Nov 2021, and ended net additional 2.75-3%.
the second rate cut since the purchases of Treasuries and agency MBS in early • We expect the Fed to announce the start of balance sheet reduction
Fed beginning of the Covid pandemic and March. in June, and finish it in 2025. We expect runoff caps of $60bn per
the 5th rate cut since the Fed raised • The Fed balance sheet currently stands at around 37% month for Treasury securities and $40bn per month for mortgage-
rates in December 2018 of US GDP. backed securities, which we project would shrink the balance sheet

Goldman Sachs Global Investment Research

to its eventual equilibrium size over three years.

• Recalibrated the pace of purchases under its Asset

Deposit facility rate: -0.50%
Purchase Programme (APP) in Mar 2022 by deciding • We expect the ECB to continue net APP purchases at €20bn/month
Last changed: September 2019 (-10bp),
on a monthly net purchase pace of €40bn for April, through Sept 2022.
the 8th cut since the ECB temporarily
€30bn for May, and €20bn for June. Expects APP net • We forecast the first 25bp Deposit Rate hike in Dec, and a second
raised interest rates in 2011
purchases to end in Q3 if the current economic 25bp hike in Mar 2023 and further 25bp hikes every six months
ECB baseline forecast is confirmed. thereafter up to a terminal rate of 1.25%.
Main refinancing operations rate: 0%
• The ECB has stated that reinvestments of the principal payments
Marginal lending facility rate: 0.25% • Has announced it will discontinue net purchases under
the Pandemic Emergency Purchase Programme from maturing securities purchased under the APP will continue for
Last changed: March 2016 (-5bp), the
(PEPP) at the end of March. an extended period of time past the date on which the ECB begins
8th cut since the ECB temporarily
• The ECB balance sheet currently stands at around to raise rates.
raised interest rates in 2011
65% of Euro area GDP.

• BoE members voted in Feb 2022 to begin to reduce

the stock of UK government bond purchases by • We think the BoE will hike rates by 25bp increments in Mar, June,
Bank Rate: 0.5%
ceasing to reinvest maturing assets, as well as to Aug, Sept, and Nov, with Bank Rate reaching 1.75% at year-end.
Last changed: February 2022 (+25bp),
begin to reduce the stock of sterling nonfinancial IG • While we expect Bank Rate to hit the 1.0% threshold for asset sales
the second rate increase since the
Central bank policy snapshot

BOE corporate bond purchases by ceasing to reinvest in June, we do not expect active asset sales to begin until August.
BoE cut rates at the beginning of the
maturing assets and by a program of corp bond sales. • Once asset sales begin, we look for around £20bn per quarter of
Covid pandemic
• The BOE balance sheet currently stands at around asset sales, in addition to the natural run-off of the balance sheet.
30% of UK GDP.

Policy deposit rate: -0.10% • The Bank voted in Jan 2021 to purchase ETFs and J-
• We expect the BOJ to maintain YCC and the NIRP throughout 2022.
Last changed: January 2016, when the REITs as necessary with upper limits of ~¥12tn and
• We expect the BOJ to continue tapering JGB purchases gradually in
Bank introduced its negative interest ~¥180bn, respectively, on annual paces of increase in
2022.
rate policy (NIRP) their outstanding amounts, as well as to purchase CP
BOJ • We expect future purchases of ETFs and J-REITs to be limited to
and corporate bonds with an upper limit on the
10y JGB yield target: ~0%, with times of significant market stress, and expect the BOJ to continue
outstanding amount of ~¥20tn in total until end-March.
tolerance band of -/+25bp (yield curve tapering those purchases throughout 2022.
control policy, YCC) • The BOJ balance sheet currently stands at around
Issue 107

135% of Japan GDP.

11
Bank, Bank of England, Bank of Japan, Goldman Sachs GIR.
Source: Federal Reserve, European Central18ee3da7952d45efb4b53828771bcd9c
 Top of Mind Issue 107

Interview with Philipp Hildebrand

El

Philipp Hildebrand is Vice Chairman of BlackRock and former Chairman of the Governing
Board of the Swiss National Bank. Below, he argues that the Russia-Ukraine conflict raises
stagflationary risks, especially in the Euro area, and that central banks will have to learn to live
with higher inflation given that the growth costs of stamping out supply-driven price shocks
would be too high at a time when growth is already weakening substantially.
The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.

Allison Nathan: How concerned are no longer justified, and, most importantly, the biggest risk right
you about the prospect of now is that long-term inflation expectations become
stagflation in the Euro area and unanchored. Central bankers are no doubt in a difficult position,
beyond at this point? but continuing to normalize is the right strategy because, as one
of my colleagues recently said, the dirty little secret of central
Philipp Hildebrand: Stagflation risk is
banking is that we don't really understand how inflation
a real concern today. Up until a couple
expectations work. And from my practical experience, that’s
of weeks ago, I wasn't particularly
exactly right. We understand that anchored inflation
worried because the inflation we were
expectations are crucial to price stability, but we know much
seeing was not the result of classic
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

less about how expectations become embedded and how they

economic overheating, but rather of a pandemic-induced supply
can come undone. So the most dangerous issue today is that
shock that I was confident would ease as economies continued
we don’t know how to observe or anticipate the moment when
to open up. So I didn’t see comparisons to the 1970s, when
inflation expectations become unanchored. And, given that the
central bankers were forced to slam on the brakes in order to
risk of a wage-price spiral has substantially increased off the
cool overheating economies, as useful. But now, on top of the
back of the two major supply shocks we’re now experiencing,
supply shock related to the economic reopening, we have
central banks must take sufficient action to exude credibility
another huge supply shock from the Russia-Ukraine conflict. So,
and ensure that long-term inflation expectations don’t become
we are looking at a supply shock layered on top of a supply
unanchored, which requires tightening policy despite increasing
shock. And the nature of the new supply shock—centered on
growth risks.
energy—suggests not only that inflation will move even higher
and likely prove more persistent moving forward, but also that Allison Nathan: Is there a distinction, though, between the
growth will take a hit. This is especially concerning in the Euro considerations of the ECB and of the Fed at this point given
area given that it's both more exposed to a disruption in energy that inflation trends are arguably more concerning in the
flows from Russia and is already starting with a relatively lower US than in Europe, and conflict-related growth concerns
growth cushion than the US is. are more acute in Europe?

To put some numbers behind this, prior to the conflict, Philipp Hildebrand: The Fed is in a less uncomfortable position

18ee3da7952d45efb4b53828771bcd9c
consensus expectations for annual growth in the year to 4Q22 vis-à-vis growth concerns for three reasons. First, the energy
for the Euro area were just above 3%, and we estimate that the cost burden as a percentage of GDP is much lower in the US
commodity supply shock we’ve already seen will shave that by than in the Euro area, where this burden is set to rise to its
about 2.5pp considering weaker real incomes, and lower highest level since 1980. Second, roughly 40% of the Euro
consumer and business confidence, as well as disruptions to area’s natural gas supplies come from Russia, which creates
the supply of essential inputs. So even without a deterioration additional vulnerability to outright disruptions in energy flows
in the geopolitical situation, we expect to be uncomfortably and surging energy prices. And, third, as mentioned, the growth
close to a zone where stagflation is a real risk in the Euro area. cushion is lower in the Euro area than in the US right now. For
And, if energy supply disruptions increase further, the hit to these reasons, I expect policy normalization in the Euro area will
Euro area growth could be even bigger, which, just be more biased towards rolling back asset purchases and less
arithmetically, could easily tip the Euro area into a stagflation focused on interest rate hikes that could weigh more heavily on
scenario of very low or even negative growth and high inflation. growth; if I were at the ECB right now, I would probably not
hike imminently and would instead wait to see how the crisis
Allison Nathan: What will these stagflation risks mean for
evolves. But in the US, we are likely to see both rate hikes and
monetary policy in the Euro area and the US?
balance sheet shrinkage in the short term to address the
Philipp Hildebrand: Unlike in past crises over the last several significant inflation concerns.
decades when the go-to reaction of central banks was to ease
Allison Nathan: That said, is the ECB is prepared to tolerate
policy, central banks today have little choice but to continue to
substantial spread widening in the European periphery as a
press ahead with policy normalization, as we saw with the
result of the ongoing crisis?
ECB’s recent decision to continue to roll back its asset
purchases despite the growth shock from Russia's invasion of Philipp Hildebrand: Given that the ECB really can’t
Ukraine, and the Fed will surely follow suit by beginning to hike meaningfully respond given the inflation concerns we've
rates this week. While central banks won’t tighten aggressively, discussed—not to mention that any room to respond is
they have to continue to normalize because the extreme level naturally limited by the already very easy starting point of
of monetary policy stimulus that the pandemic shock required is monetary policy—the name of the game on the policy side to
Goldman Sachs Global Investment Research 12
 Top of Mind Issue 107

El

contain such pressures will be fiscal policy. And we're already Philipp Hildebrand: The ECB is trying to find ways to reassure
beginning to see fiscal measures being employed, such as the the market that they're continuing to normalize to minimize the
recent announcements of energy subsidization at the EU level. risk of inflation expectations becoming unanchored. That
This policy makes sense because it addresses some of the doesn’t change my view that this will be a muted cycle and that
inflation risks; while we don’t know much about how inflation central banks will have no choice but to live with higher inflation
expectations are formed, if people are forced to pay higher for some time.
prices at the gas pump every week, that can’t be good for long-
Allison Nathan: So how should investors position for the
term expectations of price stability. So, subsidizing energy
environment that you expect?
prices seems like an effective policy response because it
cushions both the hit to growth and the risk of rising long-term Philipp Hildebrand: A world of higher and more persistent
inflation expectations. The joint issuance of bonds in the Euro inflation is worrying for bond exposure. Last year saw positive
area is also now a serious possibility to contain this equity returns and negative bond returns, which has only
fragmentation risk, and could be used aggressively if need be, happened in three of the last 50 years. Although recent
as that Rubicon was crossed during the Covid crisis. The world developments also leave the outlook for equity returns in doubt,
in which Germany objected to such instruments is now gone, there's a good chance that we could see a second year of
which should alleviate some concern about spreads blowing positive equity returns and negative bond returns, which would
out. Some periodic episodes of spread widening are still be the first time that we’ve seen this pattern for two years in a
possible, as we have seen in recent weeks, but I don’t think row in the last half century. So what we are witnessing is a
that will be a central part of the story this time around. regime change that we haven’t experienced in modern times,
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

which makes it very difficult to be constructive on bonds. For

Allison Nathan: Given the challenges that stagflation risks
this reason, we are recommending a clear underweight in
pose to policymakers, where do you expect interest rates
bonds, and, if investors need fixed income exposure, to seek it
to ultimately end up in this cycle?
through inflation-linked bonds if possible. This environment also
Philipp Hildebrand: The end point of the cycle will inevitably suggests increasing allocations to private markets. We also
be muted compared to a normal cycle because we're starting remain relatively constructive on public equities, but geopolitical
from a point of high, and likely persistent, inflation at the same risks could derail their returns depending on how the situation
time that growth is already experiencing a shock. That evolves.
essentially means that both the ECB and the Fed will have to
Allison Nathan: The stagflationary environment of the
tolerate, and learn to live with, higher inflation. At this point, I
1970s was an exceptionally notable period in economic
expect the US terminal rate to be somewhere in the 2-2.5%
history. Will this moment likely prove to be as well?
range, which is about half of the endpoint of cycles historically.
Philipp Hildebrand: The longer-term consequences of Russia's
Allison Nathan: But if you are more concerned about the
invasion of Ukraine that has given rise to these risks are quite
risk of inflation expectations becoming de-anchored off the
extraordinary. The number of long-held dogmas that have been
back of the additional supply shock, wouldn't you expect
thrown overboard in a matter of weeks is astounding, such as
terminal rates to be as high or even higher than in past

18ee3da7952d45efb4b53828771bcd9c
Germany’s decision to rearm itself, which was taken by a
cycles? Why would you expect that this normalization
Left/Green coalition, no less. We can’t overestimate how much
cycle will be shallower than past cycles?
the world—and especially Europe—has changed in a very short
Philipp Hildebrand: I expect a more muted rate hiking cycle amount of time. Some of the changes are positive. The
because inflation largely remains a supply side story; raising European Monetary Union is now a much more compelling
rates won’t ease the energy and other supply constraints that construct because of the ability to issue joint bonds and have a
are driving it. So pushing inflation down significantly would broader European response to crises in that sense, which will
require extremely aggressive tightening that would absolutely be useful in future crises. But the jury is still out on other
kill the economy. Particularly in an environment in which growth developments, such as what it really means to weaponize
is already weakening, I don’t believe that’s a trade-off that any finance and economics so aggressively. In the span of two
central bank would make. That was more debatable before the weeks, the world has essentially engineered a major financial
Russia-Ukraine conflict broke out, but it now seems completely crisis in a very large country. Right now, there's unity behind
clear to me that, especially in the Euro area where growth is this effort, partly because it's the only instrument the West has
already getting hit, central banks simply won't go the to counter Russia’s invasion. But I wonder what the inevitable
conventional route of breaking inflation’s back by just raising rewiring of the global economy towards a more fragmented
and raising rates so that terminal rates end up the same as, let system as a result of all of this will mean over the longer term.
alone higher, than they have historically at the end of the cycle.
In any case, we just marked the hundred-year anniversary of
That just strikes me as an impossibility, because you'd have to
the Versailles Peace Conference that ended WWI, and, from
crush demand to get to that point when growth is already
what I understand, the European summit to discuss how to
weakening. Realistically, that’s just not going to happen, which
respond to these tumultuous developments was held in the
is why I believe this hiking cycle will be more muted.
same room in Versailles. This is a reminder that while we must
Allison Nathan: But isn’t the ECB signaling that it's ready to deal with the current crisis, history teaches that extreme action
step in and focus on fighting inflation in the statement today also shapes the world decades from now. And so, we
from its recent meeting? can all hope that wise people were in the room this time around
to avoid making the same mistakes of a century ago again.
Goldman Sachs Global Investment Research 13
 Top of Mind Issue 107

Europe: a war-induced recession?

El

While the risks to our forecasts are two-sided, we think the risks
Jari Stehn argues that Euro area growth risks are tilted to the downside due to the potential for further
have grown sharply due to the war in Ukraine, escalation of the conflict and/or significant disruptions to
commodity flows. In our downside scenario, we assume that a
but still sees ECB policy normalization ahead ban on Russian energy exports would lead to sharply higher
energy prices and a sizable 2.2pp hit to production. In such a
The economic fall-out from the war in Ukraine has grown as the
scenario, we would expect a recession (with negative growth in
conflict has escalated, and we see four main channels through
both Q2 and Q3), with 2022 annual growth still positive at 1.4%
which the war will weigh on Euro area growth. First, financial
due in large part to base effects. Germany and Italy would
conditions have tightened significantly further in recent days,
similarly be most affected in this scenario due to the disruption
with our Euro area FCI now about 30-40bp tighter than before
in gas flows. An upside scenario with only limited disruptions to
Russia’s invasion of Ukraine. Second, trade spillovers have
gas flows would likely leave 2022 Euro area growth ~3.6%.
become more relevant as the Russian economy is contracting
sharply and many Western companies have withdrawn from the Weaker growth, with risks titled to the downside
Russian market. Third, the ongoing surge in energy prices is 2022 Euro area real GDP growth forecast, % QoQ
likely to weigh significantly more on households' real disposable 1.2 Upside
incomes, and therefore consumption, than initially anticipated.
Baseline
And fourth, we anticipate substantial production cuts due to 0.9
further energy supply disruptions from Russia given the Euro Downside
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

area’s dependence on Russian oil and gas. Taken together, we 0.6

estimate that these spillover channels point to a drag on 2022
0.3
Euro area annual growth of almost 2pp.
At the same time, we expect additional fiscal support to cushion 0
the negative growth effects of the crisis. In particular, we expect
measures that target the surge in energy prices, increase -0.3
defense spending, and increase public spending, motivated by
-0.6
the need to support refugees from Ukraine. On net, we
estimate that these measures will increase public deficits by -0.9
roughly 1% and provide a growth-hit offset of about 0.5pp in 1Q22 2Q22 3Q22 4Q22
2022 across the EMU-4. Source: Goldman Sachs GIR.

Weaker growth, downside risk Policy normalization still ahead, but delayed
All told, we see a net hit to 2022 Euro area growth of 1.4pp from The war in Ukraine has increased the risks around the ECB
the war in Ukraine, and have downgraded our growth forecast outlook, with weaker growth and higher inflation implying a
accordingly to 2.5% (from 3.9% before). With this downgrade, more difficult trade-off for policymakers. At its March meeting,

18ee3da7952d45efb4b53828771bcd9c
we expect Euro area growth to turn negative in Q2—driven by the ECB placed more weight on high inflation than the growth
lower growth in Italy and Spain—which puts the Euro area on risks from the war, and signaled that it expects to accelerate its
the edge of recession. Looking across countries, we expect the exit timeline this year. Net APP purchases will now average
growth hit to be larger in Germany (which is most reliant on €30bn in Q2 (versus €40bn previously) and are expected to end
Russian gas supply) and Italy (which uses a lot of gas in its in Q3, with a first rate hike expected "some time after.”
production) than in France (which is least reliant on Russian gas).
Given our substantial downgrade to 2022 Euro area growth, we
A significant Euro area growth hit from the war in Ukraine anticipate further downward revisions to the ECB's growth
2022 Euro area growth downgrade, pp outlook, and therefore expect that the exit timeline will be
delayed by one quarter. We now expect QE to run until
September with liftoff expected in December. From there, we
expect a second rate hike in March 2023—which will increase
the Deposit Rate to 0%—followed by hikes every six months
until a terminal rate of 1.25% is reached.

However, the uncertainty around the economic outlook implies

substantial uncertainty around the ECB’s exit timetable. In our
upside scenario, we would expect APP to end in early Q3,
2022 Downgrade: 1.4pp followed by rate hikes in September and December. But in our
downside scenario—which entails a significantly larger growth
hit—we would look for a substantial delay to ECB exit, with QE
running until 1Q23 and the first rate hike only in 3Q23.

Jari Stehn, Chief European Economist

Source: Goldman Sachs GIR. Email: jari.stehn@gs.com Goldman Sachs International
Tel: 44-20-7774-8061

Goldman Sachs Global Investment Research 14

 For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

What will cause the next European recession—according to the media and Twitter
Key terms associated with causes/drivers of the next European recession, based on financial news articles or tweets published year-to-date

Need
Money

Russia
Natural Record
Russia
Price Oil
Structural Russian Fed Putin
High
Time Energy
Prices Economics

Invasion Raise
Gas
Way

Sector
Rates Banks
Rate
Sanctions Oil Economic

Commodity
Ukraine Hikes War
Policy
Inflation
Risk

Global

Energy
Barrel Prices
Size of the Interest Economy
bubble/text
represents Economy
Europe
relative frequency of
the term in search
Stocks
results

Press Twitter

Source: Primer (news data), Brandwatch (twitter data). Special thanks to Jeffrey Luo, Dan Duggan, and Carl Cederholm.

18ee3da7952d45efb4b53828771bcd9c
 Top of Mind Issue 107

Interview with Praveen Korapaty

El

Praveen Korapaty is Chief Interest Rates Strategist at Goldman Sachs. Below, he discusses
the outlook for US yields and curve shape, and why he thinks long-end yields look mispriced.
Allison Nathan: Markets have had only a small amount of tightening will be needed to return to
to recently digest consistently the low inflation world of the last decade. Some investors in
strong inflation prints and the this camp may also ascribe higher odds to a recession or sharp
Russia-Ukraine conflict. Where do economic slowdown, which would necessitate rate cuts.
you expect yields to go from here?
A second explanation, and the one we favor, is what we refer
Praveen Korapaty: Our year-end 2022 to as a “new bond market conundrum”—long-end yields are
forecasts for 2y and 10y UST yields sticky, even as front-end yields are rising, because of a global
are 1.9% and 2.25%, respectively, duration supply/demand imbalance that's distorting the price
which suggests some further selloff signal at longer maturities, resulting in depressed real risk
and curve flattening. Although the Russia-Ukraine conflict has premia. Despite record sovereign debt issuance, there is a
led to substantial volatility in bond yields and an unwind of global shortage of risk-free long duration assets, as most G10
some hike pricing—consistent with the historical experience of central banks have been buying such assets very aggressively.
geopolitical risk slowing policy normalization—our economists Commercial banks too have been large buyers; regulation and
think that the conflict's direct US growth impacts will likely be the forced expansion of their balance sheets—a consequence
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

limited, and that it will impact inflation more than growth. In the of quantitative easing programs—have effectively made them
current environment of already-high US inflation, this suggests captive buyers of sovereign debt. So the amount of these risk-
a stronger case for the Fed to press ahead with rate hikes than free assets available to other investor classes, relative to the
in past instances of high geopolitical uncertainty. So, current growth in broader financial assets, has fallen. Without such an
volatility aside, we continue to expect directionally higher bond imbalance, long-term yields would likely be higher than they are
yields from here, and believe market expectations for a terminal today.
rate of 1.75-2% look too low.
Irrespective of which explanation is behind the back-end being
Allison Nathan: Does your expectation for further curve mispriced—and we think there is probably an element of
flattening give you pause that the curve is moving towards both—the stickiness in long-end yields will likely persist for a
inversion, historically a red flag for recession? while, which means the curve could invert early in the cycle.
Praveen Korapaty: Not particularly. Although curve inversion Allison Nathan: What would the curve look like in the
has historically been a recession signal, the odds that the 175- event that the Fed has to hike more aggressively than
200bp of rate hikes that the market is currently pricing in for markets are anticipating to rein in inflation, and how can
this cycle tip the economy into recession, while having risen investors hedge this “policy mistake” scenario?
following the Russia-Ukraine conflict, are still low. The post-
Praveen Korapaty: The curve would likely invert more

18ee3da7952d45efb4b53828771bcd9c
Covid economic recovery is far more robust than the recovery
significantly if the Fed has to hike more aggressively than
from the Global Financial Crisis. So it seems odd to assume
anticipated, assuming that the marginal investor continues to
that the Fed won’t be able to at least tighten to the rate levels
cling to the low terminal rate view. However, it’s possible that
of the last cycle, especially since in real terms this pricing is
markets come around to our view of a higher terminal rate for
actually less restrictive than in the last cycle given that we
this cycle, and so the curve could instead move up in a near
expect inflation will be higher on average this time around. The
parallel fashion with the current mild inversion. But it’s not clear
current inversion of the curve in 2024 is also unusual relative to
yet which of these two outcomes will occur, so it’s not
history in that it has occurred before the Fed has even started
necessarily a great idea for investors to take a strong view on
to raise rates, and may just largely reflect an extremely inverted
longer-term rates. Rather, investors should be more focused on
inflation curve, which we haven’t seen to this degree since the
the front-end, because even though we think long-end
1970s. Additionally, markets have tended to underestimate the
mispricing will likely dissipate eventually, what will force it to
terminal rate before the start of a cycle. Given all of these
move is the front-end cash rate moving higher, irrespective of
factors, I’m somewhat skeptical about the value of the signal
which of the two explanations is behind long-end stickiness.
from an inverted curve, at least as of now.
That’s because if investors believe that the normalization cycle
Allison Nathan: Why are market expectations of the
is shallow and the terminal rate is therefore low, they would
terminal rate as low as they are today, which has led the
likely change this belief only if presented with evidence to the
market to price curve inversion much earlier in the cycle?
contrary—for instance, if the policy rate is increased to levels
Praveen Korapaty: There are two possible explanations. One, closer to current terminal rate pricing and the economy holds
it could be that a critical mass of investors believes the up, similar to what happened in the 2004-2006 hiking cycle.
normalization cycle will be shallow. This camp of investors may Market pricing suggested that many investors at the time
believe that the natural state of the world is one of low assumed a neutral rate of around 4%. But when the Fed hiked
inflation, and so the Fed either doesn’t have to hike rates as the policy rate to 4%, and found that economic growth was still
much to bring inflation back under control, or the ongoing strong and inflation was still somewhat elevated, it continued
economic recovery isn’t as robust as it seems and therefore

Goldman Sachs Global Investment Research 16

 Top of Mind Issue 107

El

with its policy normalization. In fact, the Fed raised rates a November, as the Fed’s reduced role as a “backstop” buyer in
further 125bp before the end of that cycle. the secondary market has made market makers less willing to
aggressively make markets in off-the-run securities, and yield
If instead long-end rates are sticky because of a supply/demand
dispersion metrics have been widening as a result. Funding
imbalance, that too could be resolved by higher cash rates,
spreads, on the other hand, widened more recently as
because Fed hikes would dampen the demand for longer
sanctions on the Central Bank of Russia and the exclusion of
maturity debt from active investors who are no longer being
some Russian banks from SWIFT have modestly disrupted
adequately compensated for taking on duration risk in a flat
dollar funding markets and led to some precautionary demand.
yield curve and rising rate environment, and from foreign
While these dislocations could persist in the near term,
investors as the cost of the FX hedge rises. The supply picture
particularly in terms of commodities and trade finance, we see
is also changing as central banks unwind their balance sheets,
limited risk of a more extreme dislocation, as the overall
but this change is small relative to the potential loss of demand.
liquidity backdrop is far more supportive today compared to
Bottom line, the conundrum of low longer-term rates is likely
when funding market stresses spiked during the Covid shock.
mainly going to be resolved with higher cash rates, which is
Existing central bank swap lines could be tapped and enhanced,
why the front-end is likely the optimal location for investors to
and there are other sources of liquidity, like the Fed’s FIMA and
take short positions—this would work irrespective of whether
repo facilities. So, while the current widening could reflect
aggressive hiking turns out to be a policy mistake or not.
pressures in certain sectors, I don’t see it as indicative of
Allison Nathan: What effect will balance sheet shrinkage systemic risk. That said, we should be prepared for a more
have on curve shape? If the Fed relied more on quantitative fragile Treasury market in the presence of flow imbalances.
tightening rather than the funds rate, and perhaps even
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

Allison Nathan: What effect will other G10 central banks

pursued active asset sales, what effect would that have?
hiking rates have on US yields and the shape of the curve?
Praveen Korapaty: The classic central bank policy tightening
Praveen Korapaty: Unlike the last cycle when the Fed was the
cycle mostly relies on rate hikes, which tend to flatten the yield
sole hiker among the large central banks, policy normalization in
curve given that the front-end is almost arithmetically tied to
this cycle is likely to be more synchronized—with the exception
the policy rate setting, and, as it moves higher, it should catch
of the BOJ, we think most G10 central banks will have started
up with the longer-end that presumably reflects some sense of
policy normalization by next year. The ECB’s potential exit from
what the neutral rate is. While some Fed officials have been
negative rates and QE, which the conflict may delay,
concerned that the curve is currently flattening at very low
nonetheless deserves a special mention, because negative
levels and sending a recessionary signal, balance sheet
nominal yields on a significant share of high-quality European
shrinkage is not a particularly fruitful way to offset the flattening
debt have led to large inflows into the US and other regions
and steepen the curve. Under our baseline assumption of a
with higher-yielding debt, which has distorted equilibrium yields
$2.1-2.6tn reduction in the size of the Fed’s balance sheet, the
and suppressed risk premia in those regions. As yields in
equilibrium level of 10y yields should be around 20-30bp higher.
Europe turn positive in this cycle, the amount of investable
However, given that we expect this unwind to take place over
European assets will increase, allowing US yields to move
2-3 years, it’s unlikely that markets will fully price that in
higher. However, while bond risk premia could increase, we

18ee3da7952d45efb4b53828771bcd9c
upfront, so the resetting of equilibrium levels will likely only be
don’t think it will be sufficient to steepen the yield curve,
gradual. It’s also important to keep in mind that quantitative
because policy rate normalization—which we expect will flatten
tightening is not the opposite of quantitative easing, at least not
the curve—will be the dominant driver of curve behavior.
the way the Fed is implementing it. If Treasury leaned heavily
on bills rather than on coupon securities to replace lost Fed Allison Nathan: As yields rise across G10 economies, when
financing, investors wouldn’t have to absorb a significant do you expect real yields to move into positive territory?
amount of new duration risk, and the price impact of balance
Praveen Korapaty: In the US, I expect 10y real yields to turn
sheet shrinkage on bonds would therefore be minimal.
positive somewhere between the early and middle part of
Active Treasury sales could have a bigger impact on the level of 2023, and I similarly would expect real yields across many G10
yields, and can in theory lead to a steeper yield curve because to turn positive sometime in 2023 or 2024, though the exact
sales would introduce an element of uncertainty and force timing will depend on the trajectory of inflation and how central
investors to price in more risk premium. However, it’s unlikely banks respond. Positive real yields will make bonds more
that the Fed would engage in active asset sales, both because attractive in portfolios, both in terms of their absolute returns
a substantial amount of Treasuries is already maturing and their value as a portfolio hedge, suggesting that higher
organically, and because sales could elicit a non-linear allocations to bonds in the future could make sense.
response, and lead to disorderly repricing. That can cause
Allison Nathan: Looking ahead, how do you think about
issues with Treasury market functioning, which the Fed pays
the balance of risk to your forecast of higher yields?
close attention to and is unlikely to risk.
Praveen Korapaty: The biggest risk to our forecasts is higher
Allison Nathan: How concerning, then, is the recent
inflation and, in turn, potentially a more aggressive central bank
worsening of market liquidity and rise in dollar funding
response. If it turns out that the world is moving into a higher
costs? Are you worried about market functioning?
inflation regime, yields across the curve could rise further, with
Praveen Korapaty: Current stresses in the US rates market longer-term 10y UST yields possibly reaching 3.5-4%. Of
have occurred in two phases. Deterioration in market liquidity course, there’s a chance yields could fall short of our targets as
began when the Fed started to taper its asset purchases in well, but the risks to the upside are likely greater.

Goldman Sachs Global Investment Research 17

 Top of Mind Issue 107

Between a rock and a hard place

El

equity outperformance and underperformance of long-duration

Dominic Wilson and Vickie Chang discuss the equities like the Nasdaq. Downgrades to growth generally lead
asset implications of policy-induced versus to more pronounced pressure on equities and credit, downward
pressure on yields, and cyclical equity underperformance.
Ukraine-related growth risks
The cross-asset footprint depends on the source (and mix)
As we entered 2022, a key dynamic for asset markets was the
of shocks
delicate dance between growth and monetary policy. The first Asset changes implied by ~100bp Fed funds shock (policy) vs. a 100bp
six weeks of the year saw fears of a more aggressive Fed downgrade to 1y-ahead US GDP expectations; pp (lhs), bp (rhs)
tightening contribute to a sharp rise in bond yields. As
2 40
inflationary pressures intensified, we highlighted the risk that
the Fed might work harder to tighten financial conditions and
0 0
slow growth more rapidly to trend. Put simply, the main
concern was that the policy shock that the markets were -2 -40
digesting might morph into a growth shock, changing the
pattern of asset market responses in the process. -4 -80
That growth shock has now arrived, but from a very different
source. Russia’s invasion of Ukraine has dramatically increased -6 -120
market perceptions of growth risk, especially in Europe.
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

Commodity supply disruptions and soaring commodity prices -8 Policy only -160
are so far proving to be the main source of transmission risk to Growth only
the global economy, not central bank tightening. -10 -200
But with this new shock adding to inflationary pressures at a
time when inflation is already uncomfortably high in many -12 -240
SPX (left) UST 10y CDX IG USD TWI
economies, policymakers are likely to find themselves more (right) (right) (left)
constrained in responding to any growth damage. So, although
Source: Goldman Sachs GIR.
we have moved from the risk of a “policy-induced” slowdown
to the risk of a “policy-constrained” slowdown, the current mix The risk of a growth “scare” of this kind appeared to be rising
of policy and growth is still a difficult one. And if the Ukraine in early February, as inflation outcomes continued to exceed
crisis resolves more quickly, and with less damage to the global forecasts. The prospect of the Fed acting more aggressively to
economy than we currently expect, any subsequent relief slow growth to trend raised the possibility of a shift in the
might soon see markets revisiting policy risks yet again. correlation structure of assets, including more pressure on
cyclical equities and credit, which were relatively more resilient
The shift in risks from monetary policy to the conflict in Ukraine
at the start of the year, and ultimately downward pressure on
has changed some of the patterns in asset markets. The most
long-term yields.
obvious is that Ukraine-related risks weigh disproportionately

18ee3da7952d45efb4b53828771bcd9c
on European assets and boost commodity-related areas. And Russia-Ukraine conflict raises growth risks instead, but
because growth risk, rather than policy risk, is now more firmly policy still constrained
in the driver’s seat, equities have experienced more downside What's happened instead, of course, is that growth risks have
and yields less upside than we would have expected from a risen for an entirely different reason: Russia’s invasion of
Fed-induced slowdown. But with policymakers constrained by Ukraine. The main economic transmission from this shock to
inflation, what both scenarios are likely to have in common is the rest of the world is via sharply higher energy and
less yield relief than typical during a normal growth slowdown. commodity prices that are disproportionately damaging for the
Inflation raised risks of policy-induced slowdown European economy due to its high dependence on Russian gas.

In January and early February, the focus of global markets was Markets have moved sharply to attempt to price the
the hawkish shift in Fed, and subsequently ECB, policy. implications of these developments. Some of the patterns in
Financial conditions tightened sharply, but mostly in response asset prices match what we'd expect in the “policy-induced”
to policy shifts rather than to shifting market growth views, slowdown scenario already laid out, including much sharper
which were much more modest and even positive in Europe. pressure on cyclical assets and on credit than earlier in the
Cyclical equities outperformed earlier in the year, as did non-US year. Comparing market performance in the lead-up and
equities. But as inflation risks have grown, so too has the risk aftermath of Russia's invasion, we've seen a sharper
that the Fed would act more decisively to slow the economy underperformance of European assets and, for obvious
and that policy worries would morph into growth worries. reasons, a big rally in commodity prices, alongside
outperformance of other commodity-related assets. Financial
That kind of shift matters for markets because the market conditions have continued to tighten, but growth, not policy
footprint of a policy shock and a growth shock are different. shifts, have been the dominant driver.
Although both shocks tighten financial conditions and weigh on
risky assets, the relative mix matters for asset outcomes.
Tighter monetary policy without a growth downgrade has a
negative impact on equities and credit, but pushes yields
decisively higher and is also generally associated with cyclical

Goldman Sachs Global Investment Research 18

 Top of Mind Issue 107

El

FCI tightening was policy driven to start the year… in the face of slowing growth, we also include hawkish policy
Contribution of growth and policy shocks to cumulative change in GS shocks in both cases, which dampen the impact of growth
US FCI from December 31 to Feb 10, bp pressure on the monetary policy outlook and rates markets.

Growth shock
Market scenarios for current economic risks
contribution
100 Policy shock 12/31- 2/10- Fed-Induced Central Downside
contribution 2/10 (1) 3/11 (2) Slowdown (3) Scenario (4) Scenario (5)
80 Residual S&P 500 -5.5% -6.7% -9.5% -6.3% -9.9%
Russell 2000 -8.6% -3.5% -13.6% -8.9% -14.4%
60 Change in GS Nasdaq 100 -9.9% -9.5% -11.2% -9.0% -13.2%
US FCI Nikkei 225
40 -3.8% -9.1% -2.0% -10.4% -16.3%
HSCEI 6.7% -19.7% 0.0% -9.6% -11.8%
20
Eurostoxx 50 -2.4% -12.2% -6.9% -16.3% -26.8%
0 MSCI EM -2.6% -12.2% -5.9% -7.1% -9.4%
UST 2y 0.83 0.19 0.45 0.03 -0.04
-20
UST 5y 0.68 0.02 0.24 -0.07 -0.15
-40 UST 10y 0.53 -0.03 0.15 -0.14 -0.23
31-Dec 10-Jan 18-Jan 26-Jan 3-Feb German 10y 0.43 0.04 0.09 -0.26 -0.38
Source: Goldman Sachs GIR. CDX IG 16.1 9.5 18.8 10.8 19.8
iTraxx Main 16.7 16.3 19.0 17.2 31.2
…but has since turned growth driven
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

Oil (WTI) 17.8% 20.0% -8.3% 35.7% 50.0%

Contribution of growth and policy shocks to cumulative change in GS
JPYUSD -0.8% -1.2% -0.7% 2.4% 4.5%
US FCI from Feb 10 to present
CADUSD -0.5% -0.1% -1.3% -0.1% 0.5%
Growth shock EURUSD 0.6% -4.7% -0.4% -2.0% -2.3%
80 contribution USD TWI -0.1% 1.7% 1.4% 1.1% 1.2%
Policy shock
60 contribution GS US FCI 61 bps 63 bps 72 bps 37 bps 54 bps
Residual
Note: Column 3 reflects change from current market pricing we would expect if a Fed-
40 Change in GS induced slowdown were to re-emerge as a market concern; columns 3 and 4 reflect
US FCI expected change in market pricing since before the Russia-Ukraine conflict (Feb. 10)
under each scenario; yields are quoted in pp, credit spreads in bp.
20 Source: Goldman Sachs, Goldman Sachs GIR.

0 At a high level, the central scenario shows that asset market

shifts match the market movements across equity and rate
-20 markets in the last four weeks, although the recent bond selloff
suggests that the market has been pricing the inflation risks and
-40
central bank constraints mentioned above. While these kinds of
10-Feb 15-Feb 18-Feb 23-Feb 28-Feb 3-Mar 8-Mar 11-Mar
benchmarking exercises are inevitably imprecise, it also
Source: Goldman Sachs GIR.
suggests that markets may already have shifted in many places

18ee3da7952d45efb4b53828771bcd9c
While the recent pattern of declining yields and declining to incorporate the broad magnitude of shifts we would expect
equities looks different from a “policy-induced” slowdown, we from our assessment of the economic impact of the crisis so far.
think policy constraints are still playing a role. The ongoing
commodity supply shock hurts growth, but also puts upward The challenge is that there are still significant downside tail risks
pressure on inflation at a time when central banks are already to growth in the current situation, especially in Europe, where a
uncomfortable with the inflation outlook and worried about a full shut-off of gas supplies would reduce growth substantially
potential de-anchoring of inflation expectations. For that reason, more than in our baseline case. In a severe downside scenario,
markets are expecting both the Fed and the ECB to be less and again assuming that the ECB is constrained to some degree
willing to shift towards easier policy than might normally be the in its response by the inflationary impact of the shock, increased
case in the face of additional headwinds to growth. As a result, growth risks would likely cause significant further pressure on
yields have stayed roughly flat and risen at the front end, risk assets from here, particularly in Europe. And even with
despite the size of the growth and equity market downgrades. policy more constrained than normal, we would expect to see
So, although policy tightening is not the source of the growth larger falls in global bond yields, except perhaps at the very front
risk, we still see monetary policy constraints playing an important end of rate curves. Because of the magnitude of the downside
role in the relative moves between equities and rate markets. in this recessionary scenario, investors may struggle to exploit
the emerging value in risky assets until they either have more
Markets pricing more growth risk, but not the worst case
confidence that left tail risks are receding or that asset markets
We use our factor framework to map out a scenario that broadly are discounting those risks more aggressively.
aims to capture the assessment of economic risks that we
envisage from the current crisis. Our central scenario involves an Dominic Wilson, Senior Markets Advisor
upward shift in oil prices broadly equivalent to our commodity Email: dominic.wilson@gs.com Goldman Sachs & Co. LLC
strategists’ forecasts, and growth downgrades largely to the Euro Tel: 212-902-5924
area and to a smaller degree in the US and China, consistent with
Vickie Chang, Global Markets Strategist
our economists’ estimates. In keeping with the notion that the Fed
Email: vickie.chang@gs.com Goldman Sachs & Co. LLC
and ECB are likely to keep policy tighter than they otherwise would
Tel: 212-902-6915

Goldman Sachs Global Investment Research 19

 For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

GS GIR: Macro at a glance El

Watching
• Globally, w e expect full-year growth of 3.4% in 2022, only slightly above potential as the sizable drag from the Russia-Ukraine conflict and tighter financial conditions roughly offset medical improvements and
Top of Mind

a consumption boost from pent-up savings. We expect the conflict to exacerbate the supply-demand imbalance at the heart of the global inflation surge in the near term, but think the combination of a
moderation in demand grow th, improvements in goods and labor supply in 2H22, and tighter monetary policy will be sufficient to bring inflation back near DM central banks' targets over the next two years.
• In the US, w e expect below -consensus full-year growth of 2.9% in 2022, driven in large part by a sizable fiscal drag and at least a modestly negative impulse from financial conditions. We expect core
PCE inflation to fall to 3.9% by end-2022 as the surge in goods inflation caused by supply shortages and rising commodity prices moderates. We see the unemployment rate falling to 3.5% by end-2022.
• We expect the Fed to deliver seven consecutive 25bp rate hikes in 2022 starting in March, and also expect the start of balance sheet reduction w ill be announced in June, though the Russia-Ukraine
conflict increases uncertainty around Fed action. We expect runoff caps of $60bn per month for Treasury securities and $40bn per month for mortgage-backed securities, which we project would shrink
the balance sheet to its eventual equilibrium size in 2025. On the fiscal policy front, we think the odds of a scaled dow n reconciliation package look slightly less than even, w hich would also mean less
than even odds that Congress passes tax increases in 2022.
• In the Euro area, w e expect growth of 2.5% in 2022 given our expectation that tightening financial conditions, trade spillovers, surging energy prices and the prospect of energy supply disruptions as a
result of Russia's invasion of Ukraine w ill w eigh on activity, though fiscal support will cushion some of the crisis' negative grow th effects. We expect core inflation to peak at 3.1% in April before falling
back to 2.2% by December, but the potential for disruptions in Russian energy flow s to the Euro area present substantial dow nside risk to our grow th forecast and upside risk to our inflation forecast.

Goldman Sachs Global Investment Research

• We expect the ECB to end QE in September and raise the deposit rate by 25bp in December, though a dow nside scenario in w hich Russia stops all energy exports to the Euro area w ould likely see net
asset purchases run until 1Q23 and the first hike in 3Q23.
• In China, w e expect below-consensus real GDP grow th of 4.5% in 2022 and see near-term grow th uncertainty in light of the continued spread of the more infectious Omicron variant given China's zero-
Covid policy (ZCP), continued w eakness in the property sector, and rising risks from geopolitical uncertainty and surging commodity prices. We expect macro policy to continue to ease this year, w ith
easier monetary policy and a w ider augmented fiscal deficit, w hich we expect will significantly cushion, though not fully absorb, the impact of prolonged ZCP and the dow nturn in housing.
• WATCH THE RUSSIA-UKRAINE CONFLICT AND CORONAVIRUS. We expect the impact on global growth from the Russia-Ukraine conflict to be sizable, with the largest hit concentrated in the region
itself, the Euro area and other commodity importing countries, but see greater upside risk to inflation from the sharp resulting surge in commodity prices. On the virus front, we expect most economies to
transition to a more endemic stage of the pandemic in the spring, due to accelerated vaccinations, declines in the share of individuals without any form of immunity, and the w idespread use of oral antiviral
drugs. Goldman Sachs GIR.

Growth

Source: Haver Analytics and Goldman Sachs GIR.

Note: GS CAI is a measure of current growth. For more information on the methodology of the CAI please see “Lessons Learned: Re-engineering Our CAIs in Light of the Pandemic Recession,” Global Economics Analyst, Sep. 29, 2020.

Forecasts
Summary of our key forecasts
Issue 107

20
Source: Bloomberg, Goldman Sachs GIR. For important disclosures, see the Disclosure Appendix or go to www.gs.com/research/hedge.html. Market pricing as of March 11, 2022.

18ee3da7952d45efb4b53828771bcd9c
 Top of Mind Issue 107

Glossary of GS proprietary indices

El

Current Activity Indicator (CAI)

GS CAIs measure the growth signal in a broad range of weekly and monthly indicators, offering an alternative to Gross
Domestic Product (GDP). GDP is an imperfect guide to current activity: In most countries, it is only available quarterly and is
released with a substantial delay, and its initial estimates are often heavily revised. GDP also ignores important measures of real
activity, such as employment and the purchasing managers’ indexes (PMIs). All of these problems reduce the effectiveness of
GDP for investment and policy decisions. Our CAIs aim to address GDP’s shortcomings and provide a timelier read on the pace
of growth.
For more, see our CAI page and Global Economics Analyst: Trackin’ All Over the World – Our New Global CAI, 25 February
2017.

Dynamic Equilibrium Exchange Rates (DEER)

The GSDEER framework establishes an equilibrium (or “fair”) value of the real exchange rate based on relative productivity and
terms-of-trade differentials.
For more, see our GSDEER page, Global Economics Paper No. 227: Finding Fair Value in EM FX, 26 January 2016, and Global
Markets Analyst: A Look at Valuation Across G10 FX, 29 June 2017.

Financial Conditions Index (FCI)

For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

GS FCIs gauge the “looseness” or “tightness” of financial conditions across the world’s major economies, incorporating
variables that directly affect spending on domestically produced goods and services. FCIs can provide valuable information
about the economic growth outlook and the direct and indirect effects of monetary policy on real economic activity.
FCIs for the G10 economies are calculated as a weighted average of a policy rate, a long-term risk-free bond yield, a corporate
credit spread, an equity price variable, and a trade-weighted exchange rate; the Euro area FCI also includes a sovereign credit
spread. The weights mirror the effects of the financial variables on real GDP growth in our models over a one-year horizon. FCIs
for emerging markets are calculated as a weighted average of a short-term interest rate, a long-term swap rate, a CDS spread,
an equity price variable, a trade-weighted exchange rate, and—in economies with large foreign-currency-denominated debt
stocks—a debt-weighted exchange rate index.
For more, see our FCI page, Global Economics Analyst: Our New G10 Financial Conditions Indices, 20 April 2017, and Global
Economics Analyst: Tracking EM Financial Conditions – Our New FCIs, 6 October 2017.

Goldman Sachs Analyst Index (GSAI)

The US GSAI is based on a monthly survey of GS equity analysts to obtain their assessments of business conditions in the
industries they follow. The results provide timely “bottom-up” information about US economic activity to supplement and cross-
check our analysis of “top-down” data. Based on analysts’ responses, we create a diffusion index for economic activity

18ee3da7952d45efb4b53828771bcd9c
comparable to the ISM’s indexes for activity in the manufacturing and nonmanufacturing sectors.

Macro-Data Assessment Platform (MAP)

GS MAP scores facilitate rapid interpretation of new data releases for economic indicators worldwide. MAP summarizes the
importance of a specific data release (i.e., its historical correlation with GDP) and the degree of surprise relative to the
consensus forecast. The sign on the degree of surprise characterizes underperformance with a negative number and
outperformance with a positive number. Each of these two components is ranked on a scale from 0 to 5, with the MAP score
being the product of the two, i.e., from -25 to +25. For example, a MAP score of +20 (5;+4) would indicate that the data has a
very high correlation to GDP (5) and that it came out well above consensus expectations (+4), for a total MAP value of +20.

Goldman Sachs Global Investment Research 21

 Top of Mind Issue 107

Top of Mind archive: click to access

El

Issue 106 Issue 91

Russia Risk Investing in Racial Economic Equality
February 24, 2022 July 16, 2020

Issue 105 Issue 90

2022: The endemic year? Daunting Debt Dynamics
January 24, 2022 May 28, 2020

Special Issue Issue 89

2021: 4 themes in charts Reopening the Economy
December 17, 2021 April 28, 2020

Issue 104 Issue 88

Investing in Climate Change 2.0 Oil’s Seismic Shock
December 13, 2021 March 31, 2020

Issue 103 Issue 87

Inflation: here today, gone tomorrow? Roaring into Recession
November 17, 2021 March 24, 2020

Issue 102 Issue 86

For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

Europe at a Crossroads 2020’s Black swan: COVID-19

October 18, 2021 February 28, 2020

Issue 101 Issue 85

Is China Investable? Investing in Climate Change
September 13, 2021 January 30, 2020

Issue 100 Special Issue

The Post-Pandemic Future of Work 2019 Update, and a Peek at 2020
July 29, 2021 December 17, 2019

Issue 99 Issue 84
Bidenomics: evolution or revolution? Fiscal Focus
June 29, 2021 November 26, 2019

Issue 98 Issue 83
Crypto: A New Asset Class? Growth and Geopolitical Risk
May 21, 2021 October 10, 2019

Issue 97 Issue 82

18ee3da7952d45efb4b53828771bcd9c
Reflation Risk Currency Wars
April 1, 2021 September 12, 2019

Issue 96 Issue 81
The Short and Long of Recent Volatility Central Bank Independence
February 25, 2021 August 8, 2019

Issue 95 Issue 80
The IPO SPAC-tacle Dissecting the Market Disconnect
January 28, 2021 July 11, 2019

Special Issue Issue 79

2020 Update, and a Peek at 2021 Trade Wars 3.0
December 17, 2020 June 6, 2019

Issue 94 Issue 78
What's In Store For the Dollar EU Elections: What’s at Stake?
October 29, 2020 May 9, 2019

Issue 93 Issue 77
Beyond 2020: Post-Election Policies Buyback Realities
October 1, 2020 April 11, 2019

Issue 92 Issue 76
COVID-19: Where We Go From Here The Fed’s Dovish Pivot
August 13, 2020 March 5, 2019

Source of photos: www.istockphoto.com, www.shutterstock.com, US Department of State/Wikimedia Commons/Public Domain.

Goldman Sachs Global Investment Research 22

 Top of Mind Issue 107

El

Disclosure Appendix

Reg AC
We, Allison Nathan, Gabe Lipton Galbraith, Jenny Grimberg, Vickie Chang, Jan Hatzius, Praveen Korapaty, David Mericle, Jari Stehn, and Dominic
Wilson hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by
considerations of the firm’s business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.

Regulatory disclosures

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager
or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-
managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may
trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage.
Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking
revenues. Analyst as officer or director: Goldman Sachs policy generally prohibits its analysts, persons reporting to analysts or members of their
households from serving as an officer, director or advisor of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

may not be associated persons of Goldman Sachs & Co. LLC and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242
restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws
and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in
the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any
access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman
Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and
other meetings hosted by the companies and other entities which are the subject of its research reports. In some instances, the costs of such site
visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in
the specific circumstances relating to the site visit or meeting. To the extent that the contents of this document contains any financial product
advice, it is general advice only and has been prepared by Goldman Sachs without taking into account a client's objectives, financial situation or
needs. A client should, before acting on any such advice, consider the appropriateness of the advice having regard to the client's own objectives,
financial situation and needs. A copy of certain Goldman Sachs Australia and New Zealand disclosure of interests and a copy of Goldman Sachs’
Australian Sell-Side Research Independence Policy Statement are available at: https://www.goldmansachs.com/disclosures/australia-new-
zealand/index.html. Brazil: Disclosure information in relation to CVM Resolution n. 20 is available
at https://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of
this research report, as defined in Article 20 of CVM Resolution n. 20, is the first author named at the beginning of this report, unless indicated

18ee3da7952d45efb4b53828771bcd9c
otherwise at the end of the text. Canada: This information is being provided to you for information purposes only and is not, and under no
circumstances should be construed as, an advertisement, offering or solicitation by Goldman Sachs & Co. LLC for purchasers of securities in
Canada to trade in any Canadian security. Goldman Sachs & Co. LLC is not registered as a dealer in any jurisdiction in Canada under applicable
Canadian securities laws and generally is not permitted to trade in Canadian securities and may be prohibited from selling certain securities and
products in certain jurisdictions in Canada. If you wish to trade in any Canadian securities or other products in Canada please contact Goldman
Sachs Canada Inc., an affiliate of The Goldman Sachs Group Inc., or another registered Canadian dealer. Hong Kong: Further information on the
securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further
information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private
Limited, Research Analyst - SEBI Registration Number INH000001493, 951-A, Rational House, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400
025, India, Corporate Identity Number U74140MH2006FTC160634, Phone +91 22 6616 9000, Fax +91 22 6616 9001. Goldman Sachs may
beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian Securities Contracts (Regulation) Act, 1956) of the
subject company or companies referred to in this research report. Japan: See below. Korea: This research, and any access to it, is intended only
for "professional investors" within the meaning of the Financial Services and Capital Markets Act, unless otherwise agreed by Goldman Sachs.
Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul
Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as defined in the
Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for "wholesale clients" (as defined in the
Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. A copy of certain Goldman Sachs Australia and New Zealand disclosure
of interests is available at: https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Russia: Research reports distributed in
the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as
their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Research reports do not
constitute a personalized investment recommendation as defined in Russian laws and regulations, are not addressed to a specific client, and are
prepared without analyzing the financial circumstances, investment profiles or risk profiles of clients. Goldman Sachs assumes no responsibility for
any investment decisions that may be taken by a client or any other person based on this research report. Singapore: Goldman Sachs (Singapore)
Pte. (Company Number: 198602165W), which is regulated by the Monetary Authority of Singapore, accepts legal responsibility for this research,
and should be contacted with respect to any matters arising from, or in connection with, this research. Taiwan: This material is for reference only
and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the
responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term
is defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the
covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of
these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.

Goldman Sachs Global Investment Research 23

 Top of Mind Issue 107

El

European Union and United Kingdom: Disclosure information in relation to Article 6 (2) of the European Commission Delegated Regulation (EU)
(2016/958) supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council (including as that Delegated Regulation is
implemented into United Kingdom domestic law and regulation following the United Kingdom’s departure from the European Union and the
European Economic Area) with regard to regulatory technical standards for the technical arrangements for objective presentation of investment
recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications
of conflicts of interest is available at https://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts
of Interest in Connection with Investment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number
Kinsho 69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms
Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific
disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese
Securities Finance Company.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global
basis. Analysts based in Goldman Sachs offices around the world produce research on industries and companies, and research on
macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd
(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; Public Communication Channel
Goldman Sachs Brazil: 0800 727 5764 and / or contatogoldmanbrasil@gs.com. Available Weekdays (except holidays), from 9am to 6pm. Canal de
Comunicação com o Público Goldman Sachs Brasil: 0800 727 5764 e/ou contatogoldmanbrasil@gs.com. Horário de funcionamento: segunda-feira à
sexta-feira (exceto feriados), das 9h às 18h; in Canada by Goldman Sachs & Co. LLC; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C.,
Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs
(Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman Sachs & Co. LLC. Goldman Sachs
International has approved this research in connection with its distribution in the United Kingdom.

Effective from the date of the United Kingdom’s departure from the European Union and the European Economic Area (“Brexit Day”) the following
information with respect to distributing entities will apply:

Goldman Sachs International (“GSI”), authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority
(“FCA”) and the PRA, has approved this research in connection with its distribution in the United Kingdom.

European Economic Area: GSI, authorised by the PRA and regulated by the FCA and the PRA, disseminates research in the following jurisdictions
within the European Economic Area: the Grand Duchy of Luxembourg, Italy, the Kingdom of Belgium, the Kingdom of Denmark, the Kingdom of
Norway, the Republic of Finland, the Republic of Cyprus and the Republic of Ireland; GS -Succursale de Paris (Paris branch) which, from Brexit Day,
will be authorised by the French Autorité de contrôle prudentiel et de resolution (“ACPR”) and regulated by the Autorité de contrôle prudentiel et
de resolution and the Autorité des marches financiers (“AMF”) disseminates research in France; GSI - Sucursal en España (Madrid branch)
authorized in Spain by the Comisión Nacional del Mercado de Valores disseminates research in the Kingdom of Spain; GSI - Sweden Bankfilial
(Stockholm branch) is authorized by the SFSA as a “third country branch” in accordance with Chapter 4, Section 4 of the Swedish Securities and
Market Act (Sw. lag (2007:528) om värdepappersmarknaden) disseminates research in the Kingdom of Sweden; Goldman Sachs Bank Europe SE

18ee3da7952d45efb4b53828771bcd9c
(“GSBE”) is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism, subject to direct prudential supervision by
the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht, BaFin) and Deutsche Bundesbank and disseminates research in the Federal Republic of Germany and those
jurisdictions within the European Economic Area where GSI is not authorised to disseminate research and additionally, GSBE, Copenhagen Branch
filial af GSBE, Tyskland, supervised by the Danish Financial Authority disseminates research in the Kingdom of Denmark; GSBE - Sucursal en
España (Madrid branch) subject (to a limited extent) to local supervision by the Bank of Spain disseminates research in the Kingdom of Spain; GSBE
- Succursale Italia (Milan branch) to the relevant applicable extent, subject to local supervision by the Bank of Italy (Banca d’Italia) and the Italian
Companies and Exchange Commission (Commissione Nazionale per le Società e la Borsa “Consob”) disseminates research in Italy; GSBE -
Succursale de Paris (Paris branch), supervised by the AMF and by the ACPR disseminates research in France; and GSBE - Sweden Bankfilial
(Stockholm branch), to a limited extent, subject to local supervision by the Swedish Financial Supervisory Authority (Finansinpektionen)
disseminates research in the Kingdom of Sweden.

General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates
and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large
majority of reports are published at irregular intervals as appropriate in the analyst's judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have
investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research
Division. Goldman Sachs & Co. LLC, the United States broker dealer, is a member of SIPC (https://www.sipc.org).

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal
trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks
and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.

We and our affiliates, officers, directors, and employees, will from time to time have long or short positions in, act as principal in, and buy or sell,
the securities or derivatives, if any, referred to in this research, unless otherwise prohibited by regulation or Goldman Sachs policy.

Goldman Sachs Global Investment Research 24

 Top of Mind Issue 107

El

The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do
not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.

Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in
the products mentioned that are inconsistent with the views expressed by analysts named in this report.

This research is focused on investment themes across markets, industries and sectors. It does not attempt to distinguish between the prospects
or performance of, or provide analysis of, individual companies within any industry or sector we describe.

Any trading recommendation in this research relating to an equity or credit security or securities within an industry or sector is reflective of the
investment theme being discussed and is not a recommendation of any such security in isolation.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and,
if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from
them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may
occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all
investors. Investors should review current options and futures disclosure documents which are available from Goldman Sachs sales
For the exclusive use of ALYKHAN.SOMANI@SUNLIFE.COM

representatives or at https://www.theocc.com/about/publications/character-risks.jsp and https://www.fiadocumentation.org/fia/regulatory-

disclosures_1/fia-uniform-futures-and-options-on-futures-risk-disclosures-booklet-pdf-version-2018. Transaction costs may be significant in option
strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request.

Differing Levels of Service provided by Global Investment Research: The level and types of services provided to you by the Global Investment
Research division of GS may vary as compared to that provided to internal and other external clients of GS, depending on various factors including
your individual preferences as to the frequency and manner of receiving communication, your risk profile and investment focus and perspective
(e.g., marketwide, sector specific, long term, short term), the size and scope of your overall client relationship with GS, and legal and regulatory
constraints. As an example, certain clients may request to receive notifications when research on specific securities is published, and certain
clients may request that specific data underlying analysts’ fundamental analysis available on our internal client websites be delivered to them
electronically through data feeds or otherwise. No change to an analyst’s fundamental research views (e.g., ratings, price targets, or material
changes to earnings estimates for equity securities), will be communicated to any client prior to inclusion of such information in a research report
broadly disseminated through electronic publication to our internal client websites or through other means, as necessary, to all clients who are
entitled to receive such reports.

All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For research, models or other data related to one or more securities, markets or asset classes (including
related services) that may be available to you, please contact your GS representative or go to https://research.gs.com.

18ee3da7952d45efb4b53828771bcd9c
Disclosure information is also available at https://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.

© 2022 Goldman Sachs.

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior
written consent of The Goldman Sachs Group, Inc.

Goldman Sachs Global Investment Research 25