Morning Report

11.10.2012

Somewhat higher inflation than expected

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

Inflation in Norway surprised on the upside in September. Market development is characterized by "risk off", but most movements are quite moderate.
2.50 2.35 2.20 2.05 1.90

31-Aug 20-Sep 10-Oc t

EURNOK

SEK & 3m STIBOR 8.8 8.6 8.4 8.2 8.0

3m ra.

Core CPI-ATE in Norway increased by 1.1 percent y / y in September. This was slightly higher than consensus had expected (1.0 percent, according to Reuters), while we had estimated that inflation would be 0.2 percentage points lower. Slightly higher inflation on food products, furniture and transport meant is the primary source behind why inflation surprised on the upside. However, price growth is still below Norges Bank's projections, which in June estimated that inflation in September would be 1.3 percent. The trend this year is that inflationary pressures have eased slightly, and it appears that core inflation will come in at a few ticks higher than 1 percent for 2012. The development in price growth over the last few months is likely to lower Norges Bank's interest rate path, and we believe that the central bank in the next monetary policy report will delay its plans for when the first rate hike will come. We believe that Norges Bank will keep its key rate unchanged for the next twelve months. A positive surprise for Sweden yesterday: Industrial production rose in August. While it was expected that production would fall by 0.5 percent from July to August output instead increased by 0.4 percent. Thus, industrial output is still growing, albeit very modestly and with a falling trend. Having said that, the outlook doesn't look very much brighter. New orders fell in August for the third month in a row, and over the last two months (ie July and August) orders have declined by about 3 percent. Whereas the domestic market lowered orders in July, it was the export markets that contributed to a fall in August. Federal Reserve yesterday evening published an updated version of Beige Book. The report is based on interviews with contacts from the Fed's 12 districts, and is published two weeks in advance of each monetary policy meeting. The wording in this last report is a bit more optimistic than in the last report. Economic activity has "expanded modestly" since the last report, compared to "continued to expand gradually in most districts" in the report published in September. A modest improvement can be seen across most sectors. Consumption is flat to slightly up, with retail sales are up slightly compared to the levels from a year ago. Rising fuel prices, political uncertainty, the fiscal cliff and weather conditions are some reasons for the subdued consumption growth. Simultaneously conditions in the labor market have changed little since the last report. Some districts reported a flat to a small increase in employment, with stagnant demand, political uncertainty, the debt crisis in the euro zone as some factors dragging on employment growth. It is therefore no surprise that wage pressures are still reported as moderate. In some districts there are, however, some signs of increased wage pressures, but this is concentrated in the highly skilled segment of the labor market. In sum, the report provides a picture of an economy that is moving slightly forward, but at a moderate pace. The report gives few signs of a crisis (or recession for that matter) in the U.S. economy, but repeats on several occasions how the political uncertainty with the presidential election just around the corner and the fiscal cliff which threatens of a severe tightening of fiscal policy in 2013, is slowing the economic rebound. S&P yesterday downgraded Spain from BBB + to BBB-. This was not entirely unexpected, and S&P has now placed Spain at the same grade as Moody's, which earlier this autumn put Spain on negative watch. Market movements over the past 24 hours have again indicated a risk-off attitude. Japanese yen has appreciated on a broad basis, with USDJPY down by 0.2 percent to 78.0. Meanwhile, the euro weakened against most major currencies, but is unchanged against the dollar. Technical levels is probably the main reason for why EURUSD did not fall yesterday. The yield on US Treasuries has declined by 4 basis points, while the German Bund is unchanged. Equities have weakened on a broad basis yesterday, with Asia down this morning as well. Today we get Swedish inflation figures. We expect CPI to rise by 0.4 percent y/y, while consensus expects an increase of 0.7 percent (Reuters). As in Norway, inflation is low in Sweden, and the central bank has apparently a larger challenge in pushing inflation up, than it has to reduce inflationary pressures. In September, the central bank surprised markets by cutting its key rate on weaker prospects for economic growth and low inflation. Meanwhile some members argued for further interest rate cuts. But on several occasions, the Swedish central bank has stated that it is concerned that monetary policy is leading to financial instability, and despite that we are expecting even lower inflation this time and that the economy has slowed quite sharply in recent months, we believe that the central bank will keep its key rate unchanged going forward. ole.kjennerud@dnb.no As of Unit Prior Poll Actual Yesterday's key economic events (GMT) 07:30 Sweden Manuf. output Aug m/m % 0.3 -0.5 0.4 08:00 Norway CPI-ATE Sep y/y % 1.2 1.0 1.1 As of Unit Prior Poll DNB Todays key economic events (GMT) 07:30 Sweden CPI Sep y/y % 0.7 0.7 0.4 12:30 USA Trade balance Aug bn -42.0 -44.0 12:30 USA Initial claims Weelk 40 1000 367 370

2.40 1.60 0.80 0.00

EURSEK

31-Aug 20-Sep 10-Oc t

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

22 94 89 40 22 01 78 20

Regional sales (+47) Bergen Bod Fredrikstad Hamar Haugesund Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund

56 13 27 20 75 52 9910 69 39 41 50 62 54 14 82 52 72 09 06 61 24 79 56 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 Camilla Viland Magne stnor Kyrre Aamdal

22 01 76 56 22 01 78 03 22 01 78 24 22 01 76 63 22 01 77 41 22 01 76 57 22 01 76 67

Credit Research (+47) Ole Einar Stokstad Mikael L. Gjerding Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen

22 01 78 37 22 01 77 62 22 01 76 77 22 01 77 36 22 01 78 15

Morning Report
11.10.2012

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 125 115 105 95 85 31-Aug 94 93 92 91 90 10-Oct
$/b

20-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 31-Aug 20-Sep 10-Oc t
GBP r.a CHF

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

Prior 78.20 1.288 0.805 1.210 7.389 8.630 7.459 5.741 7.334 0.857 9.204 6.711 8.582 1.170 10.730

Last 78.04 1.286 0.803 1.209 7.375 8.613 7.458 5.737 7.356 0.857 9.175 6.698 8.592 1.168 10.721

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

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 1.0272 0.9812 0.9401 19.49 5.8025 1.6007 7.7531 123.28 0.2814 2.6857 0.5419 0.8176 3.1847 1.2295 31.1640

% 0.31% -0.07% 0.04% 0.61% 0.14% 0.00% 0.00% 0.06% -0.11% 0.18% 0.13% 0.10% 0.03% -0.11% 0.13%

EURSEK & OMXS 8.7 8.5 8.3 8.1 31-Aug 20-Sep 575 500 425 350 10-Oct

OMXS ra. EURSEK

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

NIBOR Prior 1.81 1.93 2.12 2.25 2.25 2.55 2.83 3.17

SWAP AND MONEYMARKET RATES STIBOR EURIBOR Last Prior Last Prior 1.78 1.43 1.43 0.06 1.91 1.53 1.52 0.14 2.14 1.68 1.68 0.33 2.25 1.78 1.78 0.47 2.24 1.40 1.34 0.57 2.56 1.57 1.55 0.93 2.84 1.82 1.80 1.32 3.18 2.09 2.05 1.75

Last 0.06 0.14 0.32 0.47 0.58 0.92 1.30 1.73

USD LIBOR Prior Last 0.22 0.21 0.35 0.34 0.62 0.61 0.79 0.78 0.46 0.47 0.79 0.80 1.22 1.21 1.74 1.74

Gov. Bonds, 10y 1.60 1.40 1.20 1.00

NOK, ra.

3.00 2.50 2.00 1.50

SEK

31-Aug 20-Sep 10-Oc t

10y 10y yield vs bund

NORWAY Prior Last 99.95 100.50 2.00 1.95 0.52 0.49

GOVERNMENT BONDS SWEDEN GERMANY Prior Last Prior Last 117.82 118.14 99.909 100.42 1.50 1.47 1.49 1.45 0.01 0.01

US Prior 99.5 1.68 0.19

Last 99.53 1.68 0.23

JPY and DowJones 14.0 81 13.5 79 13.0 77 12.5 12.0 75 31-Aug 20-Sep 10-Oct
USDJPY ra. DowJones, 1000

In 3m 6m 12m

INTEREST RATE FORECASTS NORWAY SWEDEN GERMANY 3m nibor 10y s wap 3m stibor 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 31-Aug 20-Sep 10-Oct

EURUSD ra. Gold

MISCELLANEOUS FRA NOK 3m Prior chg TWI Today % DEC 1.87 1.87 0.00 NOK 92.21 - 0.19 MAR 1.85 1.85 0.00 SEK 114.57 - 0.23 JUN 1.86 1.87 -0.01 EUR 100.64 0.01 SEP 1.87 1.90 -0.03 USD 80.05 - 0.03 FRA SEK 3m Prior chg GBP 83.80 0.1 DEC 1.44 1.45 -0.01 Comm. Today Last MAR 1.25 1.26 -0.01 Brent spot 116.6 116.6 JUN 1.21 1.23 -0.02 Brent 1m 114.8 114.3 SEP 1.22 1.23 -0.01 Spot gold 0.0 1761.3 Sources to all tables and graphics: Reuters and DNB Markets

Stock ex. Today Dow Jones 13,345.0 Nasdaq 3,051.8 FTSE100 5,776.7 Eurostoxx50 2,456.5 Dax 7,205.2 Nikkei225 8,546.8 Oslo 447.51 Stockholm 501.02 Copenhagen 648.03

% -1.0% -0.4% -0.6% -0.6% -0.4% 0.0% -0.6% -1.1% -0.8%

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