Morning Report

16.07.2012

More oil in the Chinese machinery

NOK & 3m NIBOR 7.70 7.60 7.50 7.40 7.30
3m ra.

2.50 2.40 2.30 2.20

EURNOK

Friday's slide of Chinese figures was largely positive reading. The absence of a further slowdown and signs of improvement in some of the monthly key figures suggest the current cycle in China has bottomed out. The figures were received positively in the markets. When the Chinese are facing a challenge it is tradition to wish each other jiayou, which translates to "add oil". This is a polite way to motivate a person, or to get the person to work harder. Both symbolically and literally, it is seems that a portion of jiayou is what the Chinese economy is in need for this year. More oil in the machinery. There are few who doubts that the Chinese economy has slowed this year. Growth in industrial production has been below 10 percent for three consecutive months. Retail sales increased by 13 percent nominally in June, the same as in April and May. Some improvement can be traced in investments, but more must be done before we can expect a recurrence in GDP growth. The authorities have taken this into consideration. Signal rates have been reduced two times in a month. Reserve requirements have been reduced by 150 basis points since November. Issuance of central bank bonds have been suspended in 2012. In sum, this will have a positive effect on the economy, and signs of improvement are already seen in some data. In June, new bank loans increased by nearly 1 trn yuan, an increase of 16 percent from the previous month. Increased borrowing should be viewed in light of the government's wish to increase investments. Earlier this year, the authorities encouraged an advancement of investment projects planned for 2012. Last week Premier Wen Jiabao emphasized that the current goal was to stimulate growth by boosting investments. An increase is already apparent in infrastructure investments. From a marked slowdown in Q1, via stabilization in Q2, to moderate improvement in Q3. The economic stimulus that has been introduced this year - monetary policy easing, increased pace of investments and new subsidies towards consumers - will have a positive effect in the third quarter. More Chinese people reported that they were interested in buying new cars in Q2 compared to previously registered data. The central government has established a credit line worth 2 trn yuan with the railway ministry, which will go to upgrading the infrastructure in the coming years. In addition, private investors are invited to take their share of the bill. This will initiate the multiplier effect. An increase in investment leads to increased demand in key industrial products like steel and cement. The Chinese can afford to use fiscal policy to counter the reduced activity. Central and local government's total debt was about 20 trn yuan, approx. 45 percent of GDP at the end of 2010. The budget deficit has been 1.7 percent of GDP on average over the last three years. Thus, the room for expansionary financial policy is large. There are, however, few signs that the government intends to stimulate the economy in the same way as in 2008, when a growth package equivalent to 4 trn yuan was put on the table. Although the short-term goal today is that "growth must be saved", it is a long-term desire to create a more balanced economy. In short, this means more consumption and less investment. This requires liberalized interest rates, exchange rates flexibility and an increase of total household income as a share of GDP. The balance between stimulating too much and too little is thin, but we believe there is no contradiction between the goal of a more balanced economy and a slightly more accommodative policy this year. Employment must be maintained so that household income will increase further. Moreover, it is room for further easing. Inflation has fallen to 2.2 percent in June, compared to about 6.5 percent 12 months back. We believe the central bank will reduce interest rates one more time this year, and it is most likely that this cut will come in the third quarter. The markets reacted positively to the Chinese numbers. Asian stock markets closed in positive territory on Friday, and have opened up today. Also European and U.S. stock indexes rose on Friday. Among others, Oslo Brs and the DAX index increased by about 2 percent. Some disappointing U.S. consumer confidence figures gained little attention and the dollar has appreciated by about 0.2 percent against the euro and the yen since Friday morning. EURNOK traded in the range below 7.50, despite an increase of 0.1 percent. The Swedish krona has weakened markedly, however, and EURSEK is up 0.6 percent. This week the eyes are turned to Ben Bernanke, who will hold his semi-annual presentation on monetary policy in the Congress on Tuesday and Wednesday. Here the market will look for signs of further monetary policy easing, under a scenario where the U.S. economy slows again. ole.kjennerud@dnb.no Yesterdays key economic events (GMT) 12:30 USA PPI 13:55 USA University of Michigan Todays key economic events (GMT) 12:30 USA Empire State (NY Fed) 12:30 USA Retail sales ex. car As of Jun Jul As of Jul Jun Unit m/m % Index Unit Index m/m % Prior 0.2 73.2 Prior 2.3 -0.4 Poll 0.2 73.4 Poll 2.8 0.0 Actual 0.2 72 DNB

5-Jun 25-Jun 13-Jul

SEK & 3m STIBOR 9.1 8.9 8.7 8.5 5-Jun 25-Jun

3m ra.

2.20

2.00 13-Jul
EURSEK

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Morning Report
16.07.2012

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 105 100 95 90 85 5-Jun 96 94 92 25-Jun 90 13-Jul
$/b

NOK TWI ra.

EUR vs GBP & CHF 1.20 0.82 1.20 0.81 0.80 1.20 0.79 1.20 1.20 0.78 5-Jun 25-Jun 13-Jul
GBP r.a CHF

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

Prior 79.26 1.225 0.787 1.201 7.474 8.619 7.439 6.102 7.706 0.869 9.514 7.038 8.888 1.155 10.946

Last 79.00 1.222 0.786 1.201 7.471 8.616 7.439 6.113 7.738 0.868 9.507 7.054 8.928 1.154 10.969

% -0.3% -0.2% -0.1% 0.0% 0.0% 0.0% 0.0% 0.2% 0.4% -0.2% -0.1% 0.2% 0.4% -0.1% 0.2%

In 1 m ...3 m 80 84 1.23 1.30 0.79 0.83 1.20 1.20 7.60 7.50 8.80 9.00 7.45 7.45 6.18 5.77 7.72 6.87 0.86 0.83 9.6 9.0 7.15 6.92 5.72 5.82 1.16 1.20 11.14 10.84

...6 m ...12 m 85 85 1.35 1.40 0.85 0.87 1.20 1.30 7.50 7.60 9.00 9.00 7.45 7.45 5.56 5.43 6.54 6.39 0.83 0.84 8.8 8.7 6.67 6.43 5.67 5.46 1.20 1.18 10.59 10.34

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

USD 1.0219 1.0158 0.9831 20.78 6.0876 1.5552 7.7572 128.86 0.2820 2.8249 0.5701 0.7960 3.4344 1.2658 32.6390

% -0.17% 0.12% 0.21% -0.02% 0.19% -0.17% -0.01% 0.12% -0.06% 0.18% 0.23% -0.14% 0.29% 0.01% 0.22%

EURSEK & OMXS 9.1 8.9 8.7 8.5 5-Jun 25-Jun 500 450 400 350 13-Jul

OMXS ra. EURSEK

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

NIBOR Prior 1.90 2.23 2.48 2.63 2.41 2.68 2.93 3.20

SWAP AND MONEYMARKET RATES STIBOR EURIBOR Last Prior Last Prior 1.93 1.88 1.87 0.15 2.24 2.10 2.09 0.38 2.50 2.36 2.35 0.69 2.64 2.47 2.45 0.87 2.41 1.68 1.68 0.78 2.67 1.82 1.80 1.08 2.92 1.99 1.97 1.42 3.19 2.15 2.14 1.78

Last 0.14 0.37 0.68 0.86 0.77 1.08 1.42 1.78

USD LIBOR Prior Last 0.25 0.25 0.46 0.46 0.73 0.73 0.91 0.91 0.55 0.58 0.85 0.85 1.21 1.20 1.62 1.60

Gov. Bonds, 10y 1.75 1.50 1.25 1.00

NOK, ra.

3.00 2.50 2.00 1.50

SEK

NORWAY Prior Last /A No Data 102.40 10y 10y yield 1.79 1.76 vs bund 0.54 0.52

GOVERNMENT BONDS US SWEDEN GERMANY Prior Last Prior Last Prior 120.35 120.40 104.568 104.76 102.35938 1.29 1.29 1.25 1.24 1.49 0.04 0.05 0.24

Last 102.42 1.49 0.25

5-Jun 25-Jun 13-Jul

13.0 12.5

JPY and DowJones

81 79 77

In 3m 6m 12m

INTEREST RATE FORECASTS NORWAY SWEDEN GERMANY 3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 2.40 3.50 2.10 2.50 0.50 2.25 2.50 3.75 2.05 2.75 0.50 2.75 2.85 4.25 2.20 3.00 0.50 3.25

US 3m libor 10y s wap 0.50 2.25 0.50 2.50 0.50 3.00

12.0 5-J un

25-Jun

75 13-Jul

USDJPY ra. DowJones, 1000

USD and gold 1670 1620 1.28 1.26 1.24 1570 1.22 1520 1.20 5-Jun 25-Jun 13-Jul
EURUSD ra. Gold

MISCELLANEOUS FRA NOK 3m Prior chg TWI Today SEP 2.11 2.12 -0.02 NOK 93.43 DEC 1.97 1.97 0.00 SEK 114.93 MAR 1.96 1.96 0.00 EUR 97.62 JUN 1.98 1.98 0.00 USD 83.41 FRA SEK 3m Prior chg GBP 84.10 SEP 1.84 1.85 -0.02 Comm. Today DEC 1.60 1.62 -0.02 Brent spot 102.6 MAR 1.51 1.53 -0.02 Brent 1m 102.6 JUN 1.48 1.50 -0.02 Spot gold 0.0 Sources to all tables and graphics: Reuters and DNB Markets

% - 0.07 0.14 - 0.18 0.15 0.1 Last 102.6 102.4 1595.5

Stock ex. Today Dow Jones 12,777.1 Nasdaq 2,908.5 FTSE100 5,666.1 Eurostoxx50 2,259.1 Dax 6,557.1 Nikkei225 8,724.1 Oslo 416.09 Stockholm 485.35 Copenhagen 601.95

% 1.6% 1.5% 1.0% 1.4% 2.1% : 2.1% 1.6% 0.4%

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