Morning report

Interest rates on hold until Q3 2012

20-Oct-2011
The Norwegian central bank yesterday decided to keep its key policy rate unchanged at 2.25 per cent. Norges Bank also lowered its interest rate path substantially. According to the new forecast, the Norwegian interest rate is expected to be kept on hold until Q3 2012. The Norwegian central bank yesterday decided to keep its key policy rate unchanged at 2.25 per cent. The central bank also lowered its interest rate path markedly. At the most the path is about 1.5 percentage points lower than their forecasts released in June. The downward revision is mainly due to international factors, like weaker growth and interest rates in the OECD countries and increased money market premiums. Norwegian growth prospects have also been revised down somewhat. In isolation recent developments indicate a lower interest rate level over the nearest months, however the central bank do not see an interest rate cut as appropriate. In stead the central bank signal that the key policy rate will be kept at current levels over a longer period. An interest rate hike is not expected until Q3 2012. Thereafter they see interest rates slowly rising. The central bank emphasizes that the uncertainty surround their forecasts is unusually large. In the main scenario they assume that the Greek debt crisis will handled in a manner which does not cause substantial negative effects for other economies. The central bank has however also released an alternative scenario where the tensions intensify and the outlook for growth and inflation weakens further. In such a scenario, the interest rate may be cut. On the other hand, if there are prospects for higher growth and inflation than currently anticipated, the interest rate may rise earlier. In total, Norges Bank seem to have been interpreted as somewhat more dovish than expected and as a result the Norwegian krone weakened slightly and Long dated FRA contract fell by a few basis points in the aftermath of the release of the monetary policy report. It is however worth noting that even if the central bank has revised down the interest rate path significantly, the markets interest rate expectations are still far lower. The market expects the central bank to cut rates by up to 50 basis points over the next 6 months. The British central bank yesterday released the minutes from their latest monetary policy committee meeting. The minutes say that the underlying growth in the British economy has slowed, primarily due to weaker international growth and increased tensions in the financial markets. Inflation is still well above its target, but is expected to fall back sharply during the first part of 2012. The weaker outlook for output growth meant that that the slack in the economy probably is greater and more persistent than previously anticipated. This makes it increasingly likely that inflation will undershoot its target in the medium term without further monetary stimulus. As a result, the members saw strong arguments for acting quickly and decisively. Asset purchases in the interval from GBP 50 to 100 billion were considered. The committee agreed on purchases totaling GBP 75 billion and to keep the bank rate maintained at 0.5 per cent. The decision was unanimous. This was somewhat surprising as some members previously have sounded skeptical of the case of more policy stimulus. Given that the decision was unanimous, the probability of further asset purchases ahead seems to have increased. This weekend's important EU meeting is approaching. However, the differences between the two leading nations, Germany and France, seem to be huge. France thinks the best solution would be to give the ESFS a banking licence, backed by the ECB. The Germans do however oppose this. The nations also have different opinions on the size and shape of the proposed "haircut" for private creditors in a restructuring of Greece's debt. Sarkozy and Merkel yesterday met in Frankfurt. The meeting broke up after two hours with neither of the leaders willing to make any comments. The market is becoming less optimistic about the prospects of the EU leaders managing to come up with sufficient measures to contain the debt crisis this weekend. As a result the euro has weakened over the past 24 hours. Stock market developments have been versatile and the oil price has declined. camilla.viland@dnbnor.no Yesterday's key economic events (GMT) 12:00 Norway Interest rate decision 12:30 US CPI excl food/energy 12:30 US Housing starts Todays key economic events (GMT) 14:00 EMU Consumer confidence 14:00 USA Philadelphia Fed 14:00 USA Existing home sales As of Sep Sep As of Oct Oct Sep Unit % m/m % mill Unit Index Index mil Prior 2.25 0.2 0.571 Prior 18.9 -17.5 5.0 Poll Actual 2.25 2.25 0.2 0.1 0.590 0.658 Poll DnB NOR

NOK & 3m NIBOR

8.00 7.80 7.60 7.40 9-Sep 29-Sep 3m ra. 3.20 3.10 3.00 2.90 19-Oct EURNOK

SEK & 3m STIBOR

9.4 9.3 9.2 9.1 9.0 8.9 9-Sep 2.60 2.55 2.50 2.45 19-Oct EURSEK

29-Sep

3m ra.
Headquarters 0021 Oslo Stranden 21 Offices Abroad New York London Shanghai Singapore Stockholm Sales Oslo (+47) Equity Fixed Income FX/IR Regional sales (+47) Bergen Bod Fredrikstad Hamar Haugesund Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund +47 03000

+1 212 681 3800 +44 207 6211111 +86 21 6132 2888 +65 6220 6144 +46 8 4734850 22 94 89 40 22 01 78 20 22 01 76 50 55 75 69 61 52 61 38 22 51 77 73 33 73 21 55 39 05 72 27 07 01 84 62 58 37 84 95 87 41 14 09 32 28 76 04 96 74 13 60 80 60 50 69 06 27 62 50 30 80 89 00 09

Research Regional Sales (+47) Eirik Larsen 22 01 76 55 Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Maren Romstad Camilla Viland Kyrre Aamdal Credit Research (+47) Ole Einar Stokstad Mikael L. Gjerding se Haagensen Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen 22 22 22 22 22 22 22 22 22 22 22 22 22 01 01 01 01 01 01 01 01 01 01 01 01 01 76 78 78 76 76 77 76 78 77 76 76 77 78 56 03 24 63 64 41 67 37 62 93 77 36 15

20-Oct-2011

Morning report

Oil spot & NOK TWI

125 120 115 110 105 100 9-Sep 100 98 96 94 19-Oct $/b

SPOT RATES AND FORECASTS (Source: Reuters and DnB NOR Markets)
FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK Prior 76.82 1.376 0.872 1.243 7.733 9.132 7.445 5.625 7.322 0.849 8.866 6.647 8.646 1.182 10.470 Last 76.77 1.370 0.872 1.244 7.735 9.132 7.446 5.648 7.365 0.848 8.886 6.664 8.687 1.180 10.482 % -0.1% -0.4% 0.0% 0.1% 0.0% 0.0% 0.0% 0.4% 0.6% 0.0% 0.2% 0.3% 0.5% -0.1% 0.1% In 1 m ...3 m 80 80 1.35 1.35 0.86 0.86 1.20 1.20 8.00 7.80 9.30 9.10 7.45 7.45 5.93 5.78 7.41 7.22 0.86 0.86 9.3 9.1 6.89 6.74 5.51 5.39 1.16 1.17 10.81 10.58 ...6 m ...12 m 80 90 1.30 1.25 0.84 0.82 1.20 1.25 7.70 7.70 9.00 9.00 7.45 7.45 5.92 6.16 7.40 6.84 0.86 0.86 9.2 9.4 6.92 7.20 5.54 6.48 1.17 1.17 10.71 10.98 FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB USD 1.0177 1.0242 0.9075 18.17 5.4337 1.5717 7.7807 116.31 0.2766 2.5199 0.5152 0.7896 3.1833 1.2725 31.1430 % -0.53% 0.41% 0.46% 0.34% 0.37% -0.36% 0.04% 0.29% 0.04% 0.35% 0.39% -0.34% 0.72% 0.35% 0.23%

29-Sep

NOK TWI ra.

EUR vs GBP & CHF

1.25 1.20 1.15 0.89 0.88 0.87 0.86

0.85 1.10 9-Sep 29-Sep 19-Oct GBP r.a CHF

Gov. Bonds, 10y

2.25 2.00 1.75 1.50 9-Sep 3.00 2.80 2.60 2.40 2.20 2.00 29-Sep 19-Oct SEK

NOK, ra.

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

JPY and DowJones

12 11 10 9-Sep 29-Sep USDJPY ra. DowJones, 1000 78 77 76 19-Oct

10y 10y yield vs bund

SWAP AND MONEYMARKET RATES (Source: Reuters) NIBOR STIBOR EURIBOR USD LIBOR Prior Last Prior Last Prior Last Prior Last 2.83 2.91 2.32 2.32 1.31 1.31 0.24 0.24 3.07 3.12 2.51 2.51 1.51 1.51 0.41 0.41 3.32 3.38 2.53 2.53 1.72 1.72 0.60 0.60 3.49 3.56 2.58 2.58 1.89 1.89 0.75 0.75 3.10 3.11 2.14 2.14 1.72 1.65 0.81 0.82 3.41 3.41 2.34 2.34 2.07 2.03 1.39 1.39 3.63 3.63 2.52 2.52 2.33 2.34 1.89 1.89 3.81 3.82 2.60 2.60 2.62 2.62 2.34 2.34 GOVERNMENT BONDS (Source: Reuters) US NORWAY SWEDEN GERMANY Prior Last Prior Last Prior Last Prior Last 113.35 109.12 114.823 114.81 101.617 101.55 99.71875 99.75 2.67 2.66 1.92 1.94 2.09 2.07 2.16 2.17 0.58 0.58 -0.17 -0.13 0.07 0.09 INTEREST RATE FORECASTS NORWAY SWEDEN GERMANY US 3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 3.05 4.25 2.50 3.00 1.50 3.00 3.20 4.50 2.75 3.25 1.50 3.25 3.50 4.50 2.90 3.25 1.50 3.25 3m libor 10y swap 0.35 3.00 0.35 3.25 0.35 3.25

In 3m 6m 12m

USD and gold

2000 1.40 1900 1.38 1800 1.36 1700 1.34 1600 1.32 1500 9-Sep 29-Sep 19-Oct EURUSD ra. Gold

EURSEK & OMXS

9.4 9.2 9.0 8.8 9-Sep 29-Sep OMXS ra. 450 430 410 390 370 350 19-Oct EURSEK

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

3m 2.91 2.66 2.57 2.57 3m 2.35 2.02 1.91 1.91

Prior 2.91 2.66 2.55 2.54 Prior 2.35 2.02 1.92 1.91

chg 0.00 0.00 0.02 0.03 chg 0.00 0.00 -0.01 0.00

TWI Today NOK 96.76 SEK 120.45 EUR 107.06 USD 77.34 GBP 79.50 Comm. Today Brent spot 112.6 Brent 1m 107.9 Spot gold 1652.5

% 0.10 0.31 - 0.26 0.36 Last 112.6 108.4 1652.5

Stock ex. Today Dow Jones 11,577.1 Nasdaq 2,657.4 FTSE100 5,410.4 Eurostoxx50 2,306.8 Dax 5,877.4 Nikkei225 8,691.1 Oslo 369.72 Stockholm 429.66 Copenhagen 450.45

% 1.6% 1.6% -0.5% -0.4% 0.3% 0.0% 0.6% -0.6% -0.7%

Morning report
20-Oct-2011
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