Morning Report

20.06.2013

Bernanke signals tapering this year

NOK & 3m NIBOR 7.70 1.90 1.85 7.60 1.80 7.50 1.75 7.40 1.70 7.30 1.65 22-May 05-Jun 20-Jun
EURNOK 3m (rha)

On yesterdays press conference Ben Bernanke indicated that the Fed might start tapering its asset purchases later this year. At yesterdays meeting Fed held its policy unchanged. This was as expected. The press statement which was published after the meeting contained little new information. But it is worth mentioning that the Fed now sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The new projections also indicate a somewhat more positive attitude among the FOMC members. Forecasts for unemployment have been adjusted down for this year and the next. If economic data are as the Fed expects, tapering will, according to Bernanke, start later this year. Further, Bernanke said on the press conference that monthly purchases will be ended when unemployment is at 7 percent. According to Fed s forecasts this will happen around mid-summer 2014. This leads to a question of whether tapering will lead to higher interest rates. I this context we think it is necessary to separate two important factors. First of all, we should remember that the Fed is tapering because the economy is improving. And normally an improving economy should lead to higher rates. Secondly, it is a question of whether the actual tapering will push rates higher. We believe this is not the case. According to our model for the 10 year treasury rate, it is the Feds balance and not the flow that is important for the interest rate. And since the Fed will continue to increase its balance albeit at a slower pace rates will remain low. Lately, however, rates have surged. Yesterday the 10 year treasury rate increased by 20 bp to 2.36 percent. The markets have a tendency to move at an early point, and we believe that the recent rate increase primarily should be seen against improved expectations to the US economy and labor market. In addition, the dollar has strengthened broadly, with EURUSD down 1 percent, while USDJPY is up 2 percent. Yesterdays signals from the Fed also led to a decline on US bourses. Today Asian stock markets have continued down, where the Hang Seng index has fallen the most (-2.5 percent). The fall is probably amplified by the most recent PMI report from China, which showed that conditions in the Chinese manufacturing sector is at its worst since September last year . Especially, the index for new orders has plunged (down 5 points to 44.0 in June). Together with a great deal of other macro data, the PMI report indicates that economic growth in China is still declining. Today Norges Bank will announce its interest rate decision from yesterdays meeting. We expect, as most others, that the interest rate will be kept unchanged at 1.5 percent (in a survey by Bloomberg only 1 of 13 analysts expects lower rate). We do, however, expect that Norges Bank will adjust its interest rate path slightly upwards. Thus, we expect that the probability of a rate cut, which is now visible in the current path, will be removed. This is both due to somewhat higher inflation and a weaker krone than Norges Bank forecasted in its last monetary policy report. However, a somewhat weaker growth momentum pulls in the opposite direction. Last week Norges Bank s Regional Network indicated that businesses expectations for output the coming 6 months are low, and consistent with an annual growth in GDP of about 2 percent. This means that growth is somewhat below trend. We believe, on the contrary to Norges Bank, that the recent signs of weakness are non-transitory. We expect that growth in mainland-GDP to decline from 2.6 percent this year to 1.9 percent next year. This is both due to lower investment growth on the Norwegian shelf and in construction. In addition, we have still not seen any signs of households becoming less cautious. This means that the saving rate will remain high and consumption growth will stay at a moderate level. Our expectations are somewhat less optimistic than those of Norges Bank. In the central banks last monetary policy report (from March) GDP growth was expected to increase to 3 percent next year, from 2 percent this year. We do not think it is obvious that the central bank will alter this view in today s report, but we shouldnt rule out any downward revisions in the growth forecast for this year. But due to our somewhat less optimist view on the Norwegian economy, we think that Norges Bank will be forced to hold interest rates unchanged to the end of 2014. This is considerably longer than the central bank forecasts in its rate path from March but also longer than we think will be signaled in the rate path which will be presented today. ole.kjennerud@dnb.no Yesterdays key economic events (GMT) 08:30 Sweden Unemployment 09:30 UK Minutes BoE 19:00 USA Fed interest rate decision Todays key economic events (GMT) 02:45 China PMI manufacturing (flash) 08:58 EMU PMI manufacturing (flash) 09:00 Norway Norges Bank interest rate As of May Jun Jun As of jun jun n/a Unit % % Unit indeks indeks % Prior 8.7 0.25 Prior 49.2 47.7 1.5 Poll Actual 8.2 0.25 DNB 48.3 1.5

Norw ay: 10y Gov't Bond 2.5 85 2.4 80 2.3 75 2.2 70 2.1 2.0 65 22-May 05-Jun 20-Jun
Rate Diff (bp, rha)

Headquarter Dronning Eufemias gate 30 0191 Oslo Offices Abroad New York London Singapore Stockholm Sales Oslo (+47) Equity Fixed Income Regional Sales (+47) Bergen Bod Fredrikstad Hamar Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund Private Clients Research Regional Sales (+47) Eirik Larsen Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Camilla Viland Magne stnor Kyrre Aamdal Credit Research (+47) Ole Einar Stokstad Martin Brter Mikael L. Gjerding Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen Kristina Solbakken Magnus Vie Sundal

+47 03000

+ 1 212 681 2550 +44 207 283 0050 +65 6220 6144 +46 84 73 48 50

22 94 89 40 24 16 90 30

56 13 27 20 75 52 99 10 69 39 41 50 62 54 14 82 61 24 79 56 38 14 61 64 24 16 90 80 51 84 04 30 77 64 76 30 73 87 49 73 33 01 73 80 70 11 69 85 24 16 90 90

24 16 90 77

24 16 90 08 24 16 90 03 24 16 90 07 24 16 90 04 24 16 90 01 24 16 90 06 24 16 90 02

24 16 90 48 24 16 90 46 24 16 90 47 24 16 90 49 24 16 90 44 24 16 90 45 24 16 90 51 24 16 91 23

0.25 Poll 48.8 1.5

Morning Report
20.06.2013

3m LIBOR
0.140 0.130 0.120 0.110 0.100 22-May
EUR

05-Jun

0.28 0.28 0.27 0.27 0.27 0.27 20-Jun

USD (rha)

Oil price & NOK TWI 94 110 93 105 92 100 91 90 95 22-May 05-Jun 20-Jun
NOK TWI USD/b (rha)

FX 0700 USD/JPY EUR/USD EUR/GBP EUR/DKK EUR/SEK EUR/CHF EUR/NOK USD/NOK JPY/NOK SEK/NOK DKK/NOK GBP/NOK CHF/NOK

Last 95.29 1.3394 0.8567 7.4603 8.6438 1.2320 7.6911 5.7430 6.03 89.04 103.15 8.980 6.245

Today 96.90 1.3251 0.8587 7.4591 8.5951 1.2327 7.6845 5.7989 5.99 89.47 103.01 8.953 6.239

Spot rates and forecasts In 1m Sep-13 Dec-13 Jun-14 FX 0700 1.7 98 105 107 110 AUD -1.1 1.30 1.26 1.30 1.32 CAD 0.2 0.85 0.85 0.86 0.87 CHF 0.0 7.45 7.45 7.45 7.45 CZK -0.6 8.55 8.45 8.50 8.60 RUB 0.1 1.24 1.25 1.27 1.30 GBP -0.1 7.55 7.50 7.45 7.40 HKD 1.0 5.81 5.95 5.73 5.61 KWD -0.7 5.93 5.67 5.36 5.10 LTL 0.5 88.3 88.8 87.6 86.0 LVL -0.1 101.3 100.7 100.0 99.3 NZD -0.3 8.88 8.82 8.66 8.51 SEK -0.1 608.87 600.00 586.61 569.23 SGD

USD NOK 0.925 5.360 1.029 5.632 0.930 623.254 19.407 29.872 32.383 17.902 1.543 8.948 7.756 0.747 0.284 20.402 2.601 2.229 0.530 10.947 0.785 4.550 6.485 89.394 1.270 4.564

US dollar 6.0 5.9 5.8 5.7 5.6 22-May 1.35 1.33 1.31 1.29 1.27 1.25 20-Jun
EURUSD(rha)

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

Prior 1.67 1.75 1.86 2.00 2.15 2.49 2.80 3.12

Last 1.69 1.76 1.86 2.00 2.15 2.47 2.77 3.09

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

Prior 1.17 1.23 1.28 1.61 1.94 2.21 2.47

Interest rates Last USD 1.17 1m 1.23 3m 1.28 6m #N/A 12m 1.61 3y 1.94 5y 2.21 7y 2.47 10y

Prior 0.19 0.27 0.41 0.67 0.62 1.21 1.77 2.33

Last 0.19 0.27 0.41 0.67 0.67 1.34 1.93 2.43

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

Prior 0.07 0.13 0.23 0.43 0.69 1.06 1.41 1.82

Last 0.07 0.13 0.24 0.44 0.69 1.08 1.42 1.82 Last 99.48 1.56 -0.81 10y sw ap 1.75 1.75 2.00

05-Jun

USDNOK

105.0 100.0
95.0

Japanese yen

90.0 22-May
USDJ PY

05-Jun

7.0 6.5 6.0 5.5 5.0 20-Jun

Norw ay Prior NST475 96.44 10y yld 2.41 - US spread 0.22 3m nibor 1.80 1.80 1.80

Norw ay Sep-13 Dec-13 Jun-14

Governm ent bonds Last SEK Prior Last US Prior 96.62 10y 95.35 95.35 10y 96.13 2.39 10y yld 2.00 2.00 10y yld 2.19 0.02 - US spread -0.19 -0.37 30y yld 3.34 Interest rate forecasts 10y 10y Sw eden 3m libor USA 3m libor sw ap sw ap 3.25 3.25 3.50 Sep-13 Dec-13 Jun-14 1.20 1.20 1.20 2.25 2.25 2.50 Sep-13 Dec-13 Jun-14 0.35 0.35 0.35

Last Germany Prior 94.53 10y 99.35 2.37 10y yld 1.57 3.42 - US spread -0.61 10y sw ap 2.00 2.00 2.50 3m euribor 0.25 0.25 0.25

Germany Sep-13 Dec-13 Jun-14

JPYNOK(rha)

SEKNOK & CHFNOK

90

89
88

87 22-May

05-Jun

6.3 6.2 6.1 6.0 5.9 5.8 20-Jun

CHFNOK (rha)

SEKNOK

Equities
15700 15200 14700 14200 13700 22May 05-Jun
Dow Jones

500 490 480 470 460 450 20-Jun

Os lo (rha)

NOK sov. NST21 NST22 NST23 NST471 NST472 NST475 NST475 NST475 NOK FRA SEP DEC MAR JUN

Miscellaneous Prior Last Change Maturity year rem. NOK-index TWI Prior 1.47 1.46 -1 18.12.2013 0.50 Last 93.47 93.47 1.49 1.44 -4 19.03.2014 0.75 Oil price: (Ldn,cl) 1m 1.51 1.50 -1 18.06.2014 0.99 SPOT 103.87 104.53 1.46 1.46 0 15.05.2015 1.90 Gold price 19.06.2013 PM 1.78 1.76 -3 19.05.2017 3.92 AM: 1366.8 1372.8 0.00 0.00 0 24.05.2023 9.93 Equities Today 0700 % last 2.39 2.38 -1 24.05.2023 9.93 Dow Jones 15112.19 -1.4% 2.41 2.39 -2 24.05.2023 9.93 Nasdaq C. 3443.20 -1.1% 3 mnd 6 mnd NOK NIDR NIBOR FTSE100 6348.82 -0.4% 1.76 1.88 1m 1.77 1.69 Eurostoxx50 2683.98 -0.6% 1.78 1.91 3m 1.87 1.76 DAX 8197.08 -0.4% 1.82 1.95 6m 1.93 1.86 Nikkei 225 12996.31 -1.9% 1.87 2.02 12m 2.07 2.00 OSEBX 477.23 -0.8% Sources to all tables and graphics: Thomson Reuters, Thomson Datastream and DNB Markets

Morning Report
20.06.2013
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