Morning Report

10.10.2012

The euro falls on lower risk appetite

NOK & 3m NIBOR 7.50 7.40 7.30 7.20
3m ra.

Somewhat lower risk appetite due to increased economic uncertainty pushed the euro down on a broad basis yesterday.
2.50 2.35 2.20 2.05 1.90

30-Aug 19-Sep 9-Oct

EURNOK

So far this week Asian markets have declined on growing uncertainty about the real economy. In Japan, the likelihood of negative growth in GDP in Q3 is increasing (rather rapidly), and the most likely outcome for Q4 seems to be tepid growth. Both the hard data, such as production data and housing starts supports this view. But various confidence indices have also deteriorated from Q2 to Q3. The PMI index, the Tankan survey and the Economic Watchers index, which all have followed GDP growth relatively well historically, has dropped somewhat over the past few months and now indicates a fall in GDP. The slowdown in Japan is due to several reasons. Most of the reconstruction work after the triple catastrophe is more or less done. Thus, the impulse from fiscal policy will be less in Q3 and Q4 than in the first half of 2012. But that is not the only reason for the most recent slowdown. The global economy is like a spiders web comprised by economies that are all mutually dependent. When the brakes are on in Europe, the pace is also slowing in Japan. As recently as yesterday the IMF downgraded its growth forecasts for the global economy by 0.2 percentage points in 2012 and 0.3 percentage points in 2013. Naturally, this is a result of the development in the euro area. In addition, the expected rebound ie when GDP will start growing again is again being postponed, and the IMF now estimates that activity in the euro area first will pick up in the second half of 2013. But the premise for this is that the euro area leaders are able to take new steps to restore confidence and reduce uncertainty. This may be harder than one might think. In Spain, the government has recently approved quite extensive cuts to improve the country's unsustainable public finances. Government revenue will be increased, partially due to a substantial increase in the VAT, while expenditure will be cut in part by reduced support to the regions. Altogether the government plans to save 40 bn euros next year, whereby the planned effect will be a reduction of the budget deficit from 6.3 percent of GDP this year to 4.5 percent in 2013. If the government is able to implement these cuts they have taken several steps in the right direction. But the government has also been met with skepticism from many corners. This particularly applies to the estimate of GDP growth for 2013, where the authorities expect a fall in GDP of 0.5 percent. If growth declines more than this, the consequence is that the targeted improvement in the budget deficit is a long shot. And the growth projections from the Spanish authorities are perhaps overly optimistic. IMF yesterday lowered their 2013 forecasts for the Spanish economy by 0.7 percentage points to -1.3 percent. It may therefore seem that Spain, even before having started, is dragging its feet in how to reach its target for reaching a sustainable development in its state finances. We can then return to the premise for the IMF's growth forecasts: Credibility and confidence, where a lack of the former makes it difficult to achieve the latter. The road to where markets and governments agree on where they are, and what is needed to move on, is probably still very long. And disagreement leads to uncertainty, and uncertainty is by itself a source of lower GDP growth. Calculations from the IMF show that a 1 standard deviation increase in uncertainty on average reduces output by 0.4 to 1.25 percentage points. Policy uncertainty is no exception to this, and from 2006 to 2011, policy uncertainty has increased by about 5 standard deviations. This has probably led to a reduction in (global) GDP growth by 2.5 percentage points during this period. We believe that the road ahead will be bumpy, and that political uncertainty will be large also going forward. Spain has not yet applied for emergency assistance. An Italian election, with Berlusconi as a possible candidate for the prime minister post, will be held the next year. Greece is likely to face another restructuring of its debt. In sum, this contributes to increased policy uncertainty, and it may thus seem that the Asian markets are doing right at being more skeptical about the economic development. Since yesterday, the market development generally pointed in the direction of reduced risk appetite. The euro has been sold against most other major currencies, with EURUSD down 0.9 percent. Also the Norwegian krone weakened against the euro, and EURNOK is traded around 7.38 in the morning hours today. Equities are also down, with the Nikkei down 1.8 percent so far today. In the US the S&P 500 ended down by 1.0 percent yesterday. Today we get Norwegian inflation figures. We expect the CPI-ATE will increase by 0.9 percent y/y in September, compared to 1.2 percent in August. Norges Bank projects an increase of 1.3 percent. From August to September we expect that prices will rise by 0.9 percent m/m, but this is not unusual for September, partly as a result of summer clothing sale is over. ole.kjennerud@dnb.no Yesterday's key economic events (GMT) 08:30 UK Manuf. output 11:30 USA NFIB Todays key economic events (GMT) 07:30 Sweden Manuf. output 08:00 Norway CPI-ATE As of Aug Sep As of Aug Sep Unit m/m % Index Unit m/m % y/y % Prior -0.5 92.9 Prior 0.3 1.2 Poll -0.6 Poll -0.9 1.0 Actual -1.1 92.8 DNB -0.5 0.9

SEK & 3m STIBOR 8.8 8.6 8.4 8.2 8.0 30-Aug 19-Sep
3m ra.

2.40 1.60 0.80 0.00 9-Oct

EURSEK

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Morning Report
10.10.2012

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 125 115 105 95 85 30-Aug 94 93 92 91 90 9-Oct
$/b

19-Sep

NOK TWI ra.

EUR vs GBP & CHF 1.22 0.82 1.22 0.80 1.21 0.78 1.21 1.20 0.76 30-Aug 19-Sep 9-Oct
GBP r.a CHF

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

Prior 78.28 1.289 0.805 1.212 7.385 8.630 7.458 5.733 7.326 0.855 9.182 6.702 8.568 1.169 10.728

Last 78.32 1.287 0.804 1.210 7.383 8.591 7.458 5.739 7.330 0.860 9.188 6.679 8.524 1.165 10.693

% 0.1% -0.2% -0.2% -0.1% 0.0% -0.5% 0.0% 0.1% 0.1% 0.6% 0.1% -0.3% -0.5% -0.4% -0.3%

In 1 m ...3 m 78 76 1.27 1.15 0.79 0.76 1.20 1.20 7.30 7.20 8.40 8.40 7.45 7.45 5.75 6.26 7.37 8.24 0.87 0.86 9.2 9.5 6.61 7.30 5.16 5.55 1.15 1.17 10.63 11.05

...6 m ...12 m 76 78 1.15 1.20 0.78 0.80 1.20 1.20 7.30 7.40 8.50 8.50 7.45 7.45 6.35 6.17 8.35 7.91 0.86 0.87 9.4 9.3 7.39 7.08 5.62 5.53 1.16 1.15 10.90 10.63

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

USD 1.0236 0.9789 0.9409 19.41 5.7969 1.6012 7.7532 123.21 0.2818 2.6838 0.5415 0.8171 3.1690 1.2304 31.1785

% 0.24% 0.04% 0.05% -0.06% 0.14% 0.04% 0.01% 0.15% -0.16% 0.12% 0.13% -0.21% 0.13% -0.08% 0.09%

EURSEK & OMXS 8.7 8.5 8.3 8.1 30-Aug 19-Sep 575 500 425 350 9-Oct

OMXS ra. EURSEK

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

NIBOR Prior 1.82 1.95 2.13 2.27 2.25 2.56 2.86 3.20

SWAP AND MONEYMARKET RATES STIBOR EURIBOR Last Prior Last Prior 1.81 1.43 1.43 0.06 1.93 1.53 1.53 0.15 2.12 1.69 1.68 0.34 2.25 1.79 1.78 0.48 2.24 1.38 1.40 0.58 2.53 1.58 1.59 0.94 2.85 1.84 1.84 1.33 3.18 2.09 2.09 1.77

Last 0.06 0.14 0.33 0.47 0.58 0.94 1.33 1.76

USD LIBOR Prior Last 0.22 0.22 0.35 0.35 0.62 0.62 0.79 0.79 0.48 0.47 0.81 0.80 1.24 1.24 1.76 1.78

Gov. Bonds, 10y 1.60 1.40 1.20 1.00

NOK, ra.

3.00 2.50 2.00 1.50

SEK

30-Aug 19-Sep 9-Oct

10y 10y yield vs bund

NORWAY Prior Last 99.8 99.95 2.02 2.01 0.54 0.52

GOVERNMENT BONDS SWEDEN GERMANY US Prior Last Prior Last Prior 117.88 118.10 100.034 100.11 99.203125 1.49 1.47 1.48 1.49 1.71 0.01 -0.02 0.23

Last 99.09 1.73 0.25

JPY and DowJones 14.0 81 13.5 79 13.0 77 12.5 12.0 75 30-Aug 19-Sep 9-Oct
USDJPY ra. DowJones, 1000

In 3m 6m 12m

INTEREST RATE FORECASTS NORWAY SWEDEN GERMANY 3m nibor 10y s wap 3m s tibor 10y swap 3m euribor 10y swap 1.90 3.25 1.65 2.25 0.25 1.75 1.90 3.25 1.65 2.25 0.25 1.75 2.05 3.50 1.65 2.50 0.25 2.00

US 3m libor 10y s wap 0.45 1.75 0.45 1.75 0.45 2.25

USD and gold 1820 1720 1620 1.32 1.28 1.24

1520 1.20 30-Aug 19-Sep 9-Oct

EURUSD ra. Gold

MISCELLANEOUS FRA NOK 3m Prior chg TWI Today % DEC 1.86 1.88 -0.02 NOK 92.33 - 0.06 MAR 1.84 1.85 -0.01 SEK 114.29 - 0.23 JUN 1.84 1.86 -0.02 EUR 100.76 - 0.13 SEP 1.86 1.89 -0.03 USD 80.03 0.05 FRA SEK 3m Prior chg GBP 83.70 0.1 DEC 1.45 1.43 0.02 Comm. Today Last MAR 1.27 1.26 0.01 Brent spot 114.8 114.8 JUN 1.24 1.22 0.02 Brent 1m 114.6 114.5 SEP 1.24 1.23 0.01 Spot gold 0.0 1774.0 Sources to all tables and graphics: Reuters and DNB Markets

Stock ex. Today Dow Jones 13,473.5 Nasdaq 3,065.0 FTSE100 5,810.3 Eurostoxx50 2,472.2 Dax 7,234.5 Nikkei225 8,596.2 Oslo 450.15 Stockholm 506.80 Copenhagen 653.15

% -0.8% -1.5% -0.5% -1.0% -0.8% 0.0% 0.1% -0.6% -0.9%

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