Morning Report

14.12.2011

Norges Bank likely to cut today

NOK & 3m NIBOR 8.00 7.80 7.60 7.40
3m ra.

No new signals from the Fed yesterday but Norges Bank probably cuts interest rates today.
3.50 3.30 3.10 2.90

3-Nov 23-Nov 13-Dec

EURNOK

No new signals from the Fed along with some weak figures for U.S. retail sales in November contributed to the weakening sentiment in the markets yesterday. The European debt crisis continues to weigh down the markets. US stocks thus fell further and the euro weakened against the dollar. EURUSD is down 1.1 per cent when typing. The Norwegian krone has weakened four re against the euro. 10-year U.S. government bond yields fell 6 bp. to 1.96 per cent. Today, Norges Bank's Executive Board hold its last monetary policy meeting for this year. We expect key policy rates will be lowered by 25 basis points, but will also point out that there is a pretty good chance that interest rates are lowered by 50 bp. According to Bloomberg 10 of 17 analysts expect that the interest rate will be lowered by 25 bps, 5 expect unchanged rates and 2 expect cuts of 50 bps. When Norges Bank presented its Monetary Policy Report in October, with estimates of unchanged interest rates towards the end of next year, the Bank pointed out: "If the economic unrest abroad intensifies, money market premiums remain high and the outlook for growth and inflation weakens further, the key rate may be reduced." It is precisely what has happened. The financial turmoil has been stronger, despite attempts to find solutions. Money market premiums have increased and are currently 20-30 bps higher than Norges Bank projected for the quarter. The economic outlook for the euro zone is weakened, and Norway will be affected. According to Consensus Forecasts the analysts on average have lowered Mainland-GDP growth for Norway next year by 0.7 percentage points from the October survey to the November survey. In fixed income markets, foreign and Norwegian forward interest rates have declined, and the market has prices in between 25 and 50 bps rate cuts in Norway in December. In the monetary policy report from October, Norges Bank presented an alternative with a lower interest rate path. In the alternative, Norges Bank assumes that money market premiums remain high until the summer of next year, a deeper and prolonged recession abroad than forecasted and that the impact on the Norwegian economy comes fast. In this alternative, the interest rates are lowered by 50 bps during December and March and further down on the next meetings. The interest rate path in this scenario is consistent with 25 bps interest rate reduction in December and a probability of about 50 percent for an additional 25 bps at this meeting. With a cut of 25 bps it is likely that the 3m NIBOR will rise. Note that Norges Bank in the main path estimated 3m NIBOR to 3.00 per cent for the first quarter. With a cut of 25 bps we will probably start the quarter with interest rates well above that level. The main argument for not cutting 50 bps is the figures from the regional network, which indicates that growth will remain buoyant and that expectations are still relatively high. The U.S. monetary policy committee (FOMC) reiterated, as expected, that the interest rate will be kept exceptionally low until the middle of 2013. Measures to extend the maturity of the portfolio of government securities were continued. FOMC noted that new information indicated some growth in the economy and improvement in the labor market. Strains in global financial markets continue to pose significant downside risks to the economic outlook. In the U.S. retail sales rose 0.2 percent from October to November. It was weaker than expected. The core components rose less than projected. These figures include price changes. According to the Reuters consensus analysts on average expect a rise in consumer prices of 0.1 per cent during the same period. The real consumption growth is thus close to zero. In Sweden, inflation was slightly higher than expected. Underlying inflation, measured by KPIF (CPI with fixed charges), rose 1.1 percent to / y in November, as in October and in line with the National Bank's latest estimates, but slightly stronger than expected 1.0 percent. Moderate inflation is NOK an argument to cut interest rates at the December meeting, even though the effects of financial market turbulence and weak growth in the euro zone is important kyrre.aamdal@dnb.no Yesterday's key economic events (GMT) 08:30 Sweden CPI 09:30 UK CPI 13:30 USA Retail trade 19:15 USA FOMC Todays key economic events (GMT) 10:00 EMU Goods production 13:00 Norway Monetary policy decision As of nov nov nov des As of okt des Unit y/y % y/y % m/m % % Unit m/m % % Prior 2.9 5.0 0.5 0.25 Prior -2.0 2.25 Poll 2.7 4.8 0.6 0.25 Poll 0.1 2.00 Actual 2.8 4.8 0.2 0.25 DNB 2.00

SEK & 3m STIBOR 9.5 9.3 9.1 8.9

3m ra.

2.80 2.70 2.60 2.50 2.40

EURSEK

3-Nov 23-Nov 13-Dec

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 55 87 60 69 39 41 50 61 05 14 69 52 72 09 06 61 27 32 27 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 Maren Romstad Camilla Viland Kyrre Aamdal

22 01 76 56 22 01 78 03 22 01 78 24 22 01 76 63 22 01 76 64 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

Morning Report
14.12.2011

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 118 112 106 100 3-Nov 100 98 96 94 23-Nov 13-Dec
$/b

NOK TWI ra.

EUR vs GBP & CHF 0.87 0.86 1.20 0.85 1.15 0.84 1.10 0.83 3-Nov 23-Nov 13-Dec 1.25
GBP r.a CHF

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

Prior 77.99 1.303 0.842 1.233 7.742 9.111 7.436 5.942 7.618 0.851 9.196 6.989 8.965 1.177 10.825

Last 77.97 1.303 0.841 1.232 7.735 9.096 7.436 5.941 7.618 0.851 9.196 6.988 8.956 1.177 10.823

% 0.0% 0.0% -0.1% -0.1% -0.1% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1% 0.0% 0.0%

In 1 m ...3 m 80 80 1.35 1.35 0.86 0.86 1.23 1.23 7.80 7.80 9.20 9.10 7.45 7.45 5.78 5.78 7.22 7.22 0.85 0.86 9.1 9.1 6.81 6.74 5.45 5.39 1.18 1.17 10.70 10.58

...6 m ...12 m 80 90 1.30 1.25 0.84 0.82 1.23 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 1.0010 1.0351 0.9459 19.74 5.7078 1.5491 7.7812 121.83 0.2788 2.6504 0.5359 0.7554 3.5145 1.3068 31.7800

% 0.02% 0.12% -0.02% 0.15% 0.06% 0.05% 0.02% 0.19% 0.06% 0.02% 0.15% -0.11% 0.04% 0.11% -0.03%

EURSEK & OMXS 9.4 9.2 9.0 8.8 3-Nov 500 450 400 350 23-Nov 13-Dec
OMXS ra. EURSEK

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

N IBOR Prior 2.93 3.09 3.22 3.30 2.86 3.17 3.41 3.63

SWAP AN D MON EYM ARKET RATES STIBOR EURIBOR Last Prior Last Prior 3.04 2.44 2.45 1.07 3.15 2.73 2.76 1.36 3.26 2.76 2.78 1.61 3.36 2.81 2.82 1.80 2.85 1.86 1.85 1.49 3.15 1.97 1.95 1.89 3.38 2.15 2.14 2.25 3.61 2.26 2.22 2.53

Last 1.06 1.36 1.61 1.80 1.50 1.88 2.23 2.53

USD LIBOR Prior 0.28 0.54 0.76 0.92 0.79 1.24 1.68 2.13

Last 0.28 0.55 0.77 0.93 0.81 1.25 1.70 2.11

Gov. Bonds, 10y 2.00 1.75 1.50

NOK, ra.

3.00 2.50 2.00 1.50

SEK

10y 10y yield vs bund

N ORWAY Prior Last 116.55 112.30 2.30 0.25 2.28 0.27

GOVERNM ENT BON DS SWEDEN GERMANY US Prior Last Prior Last Prior 117.999 118.00 99.696 99.89 100.32813 1.62 -0.43 1.62 -0.40 2.05 2.01 1.96 -0.09

Last 100.31 1.98 -0.04

3-Nov 23-Nov 13-Dec

13 12 11

JPY and DowJones

10 3-Nov

23-Nov

79 78 77 76 75 13-Dec

In 3m 6m 12m

INTEREST RATE FORECASTS N ORWAY SWEDEN GERMANY 3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 3.00 4.25 2.20 3.00 1.30 3.00 2.80 4.50 2.10 3.25 1.10 3.25 3.10 4.50 2.00 3.25 1.05 3.25

US 3m libor 10y 0.55 0.55 0.50

swap 2.75 3.00 3.25

USDJPY ra. DowJones, 1000

USD and gold 1900 1800 1700 1600 1500

EURUSD ra.

1.46 1.42 1.38 1.34 1.30

Gold

3-Nov 23-Nov 13-Dec

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

3m 3.11 2.68 2.36 2.29 3m 2.81 2.37 1.90 1.64

Prior 3.14 2.69 2.38 2.30 Prior 2.81 2.39 1.90 1.63

chg -0.03 -0.01 -0.02 -0.01 chg 0.00 -0.02 0.00 0.00

MISCELLANEOUS TWI Today % Stock ex. Today % NOK 96.73 - 0.09 Dow Jones 11,954.9 -0.6% SEK 120.40 0.13 Nasdaq 2,579.3 -1.3% EUR 103.39 - 0.09 FTSE100 5,490.2 1.1% USD 80.29 0.06 Eurostoxx50 2,261.0 -0.4% GBP 80.90 Dax 5,774.3 -0.2% Comm. Today Last Nikkei225 8,519.1 0.0% Brent spot 109.9 109.9 Oslo 370.05 0.6% Brent 1m 109.3 109.5 Stockholm 436.07 1.5% 0.9% Spot gold 1672.5 1672.5 Copenhagen 492.24 Sources to all tables and graphics: Reuters and DNB Markets

Morning Report
14.12.2011
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