Morning Report

17.02.2012

Hawkish signals from Norges Bank

Norwegian central bank governor is not willing to lower rates in order to return faster to the inflation target. The Riksbank cut its repo rate again, while strong US data supports markets.
3.20 2.90 2.60 2.30

9-Jan 27-Jan 16-Feb

SEK & 3m STIBOR 9.0 8.9 8.8 8.7 9-Jan

2.70 2.60 2.50 2.40 27-Jan 16-Feb

Norwegian central bank governor Olsen used his second Annual Address to deliver a clear political message regarding his monetary policy strategy. Norges Bank has for a long time practiced flexible inflation targeting. In periods when inflation is far away from the target (like now), the central bank may choose spend some more time to get back to the target in order to avoid too large fluctuations in the real economy. Yesterday Olsen went significantly longer in this interpretation of the mandate. A lower interest rate directed towards boosting domestic inflation by a sharp rise in costs is undesirable ("This cannot be the way to go"), because it could lead to a further weakening of competitiveness, despite a depreciation of the NOK. In addition, "low interest rates over time tend to amplify an upward spiral in house prices and lending", which could have "severe ripple effects further ahead". In other words: Olsen will put more emphasis on stabilizing the real economy at the expense of inflation. This reinforces our belief that the policy rate will not be cut again this year, given the absence of additional severe negative shocks to the economy. Yesterday's Norwegian national accounts showed that the mainland economy grew by 0.6 per cent in the fourth quarter of 2011, despite the crisis in Europe and the turmoil in financial markets. This was marginally stronger than consensus (0.5 per cent, according to Reuters). Domestic demand - private and public consumption as well as business investment - is growing. Exporters are having a hard time though. Exports of traditional goods (excluding oil and gas) fell by nearly 5 per cent in the fourth quarter, after falling by one per cent in Q3. Statistics Norway also released new forecasts yesterday. They expect the economy to grow at trend this year and into 2013, and thereafter a modest economic recovery. They expect, like us, that the key policy rate will remain flat throughout the year. The Riksbank cut its key policy rate by another 25 basis points, to 1.5 per cent, at its meeting yesterday. This was widely expected by the market. The slowdown of the Swedish economy has been more severe than the central bank had expected, and its GDP estimate for 2012 has been revised down from 1.3 to 0.7 per cent. The repo rate path signals a flat repo rate until the summer of 2013. This is well in line with our own estimates. But in parallel with the release of the central bank's new estimates, Statistics Sweden released January inflation figures. These were surprisingly low. Underlying inflation, CPIF, was 0.9 per cent y//y, while the Riksbank's brand new estimate was 1.2 per cent. Consensus was an increase of 1.1 per cent. Consequently, Swedish interest rates pulled down and the SEK weakened. US macro data are continuing to encourage hopes of a stronger recovery. Initial claims dipped to 348,000 last week, the lowest level since March 2008. This points to a further decline in unemployment. Philadelphia Fed's manufacturing index rose in February and points (as the NY index) to a further increase in the national manufacturing index (ISM). Housing starts increased more than expected in January, and December numbers were upwardly revised. This supports the positive impression from the housing entrepreneurs earlier this week (NABH index) and fuels hopes that the US housing market is on its way up again after a dramatic and long-lasting fall. Strong US data led to a strengthening of the dollar against the yen, and along with rumors that a Greek debt deal on Monday is within reach, it has also led to increased risk appetite. Hence US stock markets rose along with US long government bond yields (the latter by almost ten points from yesterday morning). Asian markets have continued the positive trend during the night. In the FX market, the euro has strengthened against the dollar and the Norwegian krone has strengthened further. The EURNOK is presently trading at 7.51, probably reflecting stronger risk appetite as well as higher interest rate expectations in the wake of Olsen's speech yesterday. kjersti.haugland@dnb.no

Headquarters 0021 Oslo Stranden 21

+47 03000

Offices Abroad New York London Shanghai Singapore Stockholm

+1 212 681 3800 +44 207 6211111 +86 21 6132 2888 +65 6220 6144 +46 8 4734850

Sales Oslo (+47) Equity Fixed Income FX/IR

22 94 89 40 22 01 78 20 22 01 76 50

Regional sales (+47) Bergen Bod Fredrikstad Hamar Haugesund Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund

55 21 95 80 75 52 9910 69 39 41 50 62 54 14 82 52 72 09 06 61 24 79 56 38 07 28 62 22 01 76 50 51 84 04 30 77 62 96 80 73 58 74 89 33 01 73 80 70 11 69 85

Research Regional Sales (+47) Eirik Larsen 22 01 76 55

Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Camilla Viland Kyrre Aamdal

22 01 76 56 22 01 78 03 22 01 78 24 22 01 76 63 22 01 77 41 22 01 76 67

Credit Research (+47) Ole Einar Stokstad Mikael L. Gjerding se Haagensen Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen

22 01 78 37 22 01 77 62 22 01 76 93 22 01 76 77 22 01 77 36 22 01 78 15

Yesterday's key economic events (GMT) 08:30 Sweden CPIF 08:30 Sweden MPC meeting 09:00 Norway GDP, mainland 13:30 USA Initial claims 13:30 USA Housing starts Todays key economic events (GMT) 09:30 UK Retail sales 13:30 USA CPI ex food and energy

As of Jan Q4 W6 Jan As of Feb Jan

Unit y/y % % q/q % 1000 mill Unit m/m % m/m %

Prior 0.5 1.75 0.8 358 0.657 Prior 0.6 0.1

Poll 1.1 1.50 365 0.675 Poll -0.4 0.2

Actual 1.1 1.50 0.4 348 0.699 DNB

Morning Report
17.02.2012

SPOT RATES AND FORECASTS

102 100 98 96 94 27-Jan 16-Feb

EUR vs GBP & CHF 1.25 1.20 1.15 1.10

0.85 0.84 0.83 0.82 0.81

9-Jan 27-Jan 16-Feb

FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK

Prior 78.88 1.314 0.832 1.207 7.527 8.826 7.433 5.729 7.265 0.853 9.052 6.716 8.526 1.174 10.619

Last 79.15 1.314 0.831 1.208 7.526 8.824 7.434 5.731 7.240 0.853 9.060 6.719 8.492 1.173 10.622

% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.4% 0.0% 0.1% 0.0% -0.4% -0.1% 0.0%

In 1 m ...3 m 77 77 1.30 1.30 0.83 0.83 1.23 1.23 7.60 7.75 8.90 9.20 7.45 7.45 5.85 5.96 7.59 7.74 0.85 0.84 9.2 9.3 6.85 7.08 5.27 5.45 1.17 1.19 10.72 11.08

...6 m ...12 m 80 85 1.35 1.40 0.85 0.87 1.23 1.30 7.65 7.65 9.00 9.00 7.45 7.45 5.67 5.46 7.08 6.43 0.85 0.85 9.0 8.8 6.67 6.43 5.33 5.46 1.18 1.18 10.59 10.34

FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB

USD 1.0773 0.9963 0.9193 19.15 5.6588 1.5808 7.7550 123.84 0.2781 2.6287 0.5323 0.8372 3.1985 1.2602 29.9688

% 0.11% -0.02% 0.07% 0.52% 0.04% 0.02% 0.02% 0.02% 0.00% 0.01% 0.08% 0.41% 0.08% -0.10% -0.28%

EURSEK & OMXS 9.0 8.9 8.8 8.7 9-Jan

550 500 450 400 350 27-Jan 16-Feb

1m 3m 6m 12m 3y 5y 7y 10y

NIB OR Prior 2.26 2.67 3.03 3.21 2.87 3.13 3.36 3.58

SWAP AND MONEYMARKET RATES STIBOR EURIBOR Last Prior Last Prior 2.24 2.19 2.10 0.56 2.65 2.46 2.37 0.98 2.99 2.60 2.53 1.30 3.17 2.66 2.62 1.49 2.88 1.90 1.91 1.26 3.14 2.06 2.07 1.61 3.38 2.28 2.28 1.97 3.59 2.45 2.45 2.33

Last 0.55 0.97 1.30 1.48 1.25 1.60 1.96 2.33

USD LIBOR Prior 0.25 0.50 0.75 0.90 0.70 1.12 1.58 2.06

Last 0.25 0.49 0.75 0.90 0.72 1.14 1.60 2.07

Gov. Bonds, 10y 2.00 1.75 1.50

3.00 2.50 2.00 1.50

9-Jan 27-Jan 16-Feb

10y 10y yield vs bund

NORWAY Prior Last 115.4 111.75 2.34 2.32 0.47 0.43

GOVERNMENT BONDS SWEDEN GERMANY US Prior Last Prior Last Prior 115.349 115.41 101.101 100.93 100.14063 1.84 1.84 1.86 1.90 1.98 -0.02 -0.05 0.12

Last 100.05 2.01 0.11

14 13 12 11 10

JPY and DowJones

9-Jan

27-Jan

80 79 78 77 76 75 16-Feb

In 3m 6m 12m

INTEREST RATE FORECASTS NORWAY SWEDEN GERMANY 3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 2.65 3.50 2.40 2.25 1.05 2.50 2.55 3.75 2.20 2.50 1.05 2.75 2.45 4.25 2.00 3.00 1.05 3.25

US 3m libor 10y swap 0.50 2.25 0.50 2.50 0.50 3.00

USDJPY ra. DowJones, 1000

USD and gold 1.42 1900 1.38 1800 1.34 1700 1.30 1600 1.26 1500 9-Jan 27-Jan 16-Feb
EURUSD ra. Gold

FRA NOK MAR JUN SEP DEC FRA SEK MAR JUN SEP DEC

3m 2.59 2.42 2.42 2.42 3m 2.22 1.93 1.73 1.67

Prior 2.59 2.42 2.42 2.43 Prior 2.21 1.93 1.72 1.66

chg 0.00 0.00 0.00 -0.01 chg 0.02 0.00 0.01 0.01

MISCELLANEOUS TWI Today % Stock ex. Today % NOK 94.11 - 0.04 Dow Jones 12,904.1 1.0% SEK 116.97 - 0.01 Nasdaq 2,959.9 1.5% EUR 103.27 0.13 FTSE100 5,885.4 -0.1% USD 79.39 - 0.01 Eurostoxx50 2,489.4 -0.2% GBP 81.50 Dax 6,752.0 -0.1% Comm. Today Last Nikkei225 9,384.2 0.0% Brent spot 122.6 122.6 Oslo 420.86 0.2% Brent 1m 120.4 120.1 Stockholm 499.61 0.4% -1.0% Spot gold 0.0 1713.0 Copenhagen 579.97 Sources to all tables and graphics: Reuters and DNB Markets

Morning Report
17.02.2012
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