Morning Report

28.12.2012

2012: A good year for forecasters

NOK & 3m NIBOR
7.45 7.40 7.35 7.30 7.25 19Nov 7-Dec 27Dec
EURNOK 3m ra.

2.00

It may not have been felt that way, but 2012 gave us no major shocks. Therefore, the year was also a reasonably good year for those of us that attempt to forecast future developments. With less than 90 hours left of 2012, it seems appropriate to take stock of the year. What did we say? And how did it go? In mid-December last year, we published, routinely, our new forecasts for the coming year. We estimated then that global GDP would increase by 3.4% from 2011 to 2012. The year is not yet over, and final GDP data are still some distance away, but our latest estimates from mid-December this year indicate global growth of 3.2% this year. For advanced economies, growth will end up around 1.2%, compared to the 1.4% assumed a year ago. The US and Eurozone forecasts fared even better, with expected outcomes of 2.2% (against the forecasted 2.1%) and -0.4% (-0.4%). For Sweden (1.0% vs 1.2%) and Japan (2.0% vs 1.8%), the deviations are small. The main reason for the small deviations is the absence of major shocks. While 2011 presented us with the Arab Spring and higher oil prices, the Japanese triple disaster and the worsening of the European debt crisis, the current year has spared us for such shocks - without necessarily claiming that volatility has been absent. Another reason is the "law of large numbers", namely that minor surprises tend to even each other out at the aggregate level. Digging into the details, deviations are larger. Although our annual GDP estimate is spot on, we may have missed the developments from quarter to quarter, or the various demand components. And some economies surprised us more than others. British GDP was essentially flat this year, much worse than our projected growth of 1.2% growth a year ago. Norways Mainland GDP gained 3.5%, against 2.5% predicted a year ago. Private consumption, mainland investments and net exports all rose more than we thought a year earlier. In early 2012, I wrote the newspaper commentary "Not this year," listing ten things we were pretty sure would not happen in 2012. On top of the list was a possible Eurozone collapse. We believed then, and still believe, that EU leaders would use all possible measures to keep the Eurozone together. So far this has been a correct judgment. The second item on the list was a hard landing in China. We estimated GDP growth in China of 8.0%. Now, our estimate is 7.7%. Point three was that GDP/capita growth in EMEs below 4%. The latest IMF-estimate is 4.3%. Fourth was oil prices below USD80/b. By late June, the price hit a year-low of USD90. Fifth was a decline in OECD unemployment. Unfortunately, this was also proven correct. At year end, approximately 1 million more are unemployed in the OECD nations than a year ago. But on our sixth point we missed: We believed that we would not see safe haven Western long-dated government bond rates below 1 percent. In late July, the German ten-year interest rate hit 1.15%, and a few days later the US bottomed at 1.39%. Two of our three "non-predictions" for Norway was correct: Housing prices did not decline (actually, they will rise by 7.5% against our forecasted 4.5%) and Norges Bank did not raise its signal rate (it is now 1.5 %, exactly as predicted a year ago). But our third view was that the NOK would not be a safe haven in uncertain times, and we envisaged EURNOK at 7.70 in December 2012. By mid-December it traded at 7,38. But seven out of nine possible matches implied that we also hit the tenth, very certain, prediction: That we would be making forecasting errors! Other currency forecasts were better. In mid-December this year EURUSD traded at 1.31 (vs. an estimated 1.25 a year earlier), USDJPY at 83.5 (90, but right direction), EURGBP at 0.81 (0.82, right direction) and EURSEK at 8.77 (9.00, right direction). Best hit, however, was the USDCNY exchange rate, which strengthened from 6.37 to 6.24, exactly as forecasted a year earlier. All signal rates were by mid-December exactly as predicted a year ahead. But similarly to our too high forecasts for safe haven government bond rates, we were off the mark on other long-term rates as well. The hunt for (safe) returns, and expectations of low short-term rates for a long time to come, pulled long rates down. For example, the Norwegian ten year swap rate was around 3.1% in mid-December, well below the 4% we had projected a year earlier. In sum: We had good calls on macroeconomic developments and central banks interest rates, and pretty good ones on exchange rates, but failed to translate appropriate macroeconomic forecasts into good estimates for long-term interest rates. But our errors of course pale in comparison with this year's worst prediction error, the Maya calendars end of the world as we know it. We celebrated Christmas as usual this year. Certainly one of the forecasting errors most of us live happily with. oystein.dorum@dnb.no Yesterdays key economic events (GMT) 13:30 US Initial claims 15:00 US New home sales 15:00 US Consumer confidence Todays key economic events (GMT) 08:30 Sweden Retail sales 14:45 US Chicago PMI 15:00 US Pending home sales As of Week 51 Nov Dec As of Nov Dec Nov Unit 1000 1000 Index Unit m/m % Index m/m % Prior 362r 368 71,5r Prior -1.7 50.4 5.2 Poll 360 378 70.0 Poll 0.2 51.3 1.0 Actual 350 377 65,1 DNB 0.1

1.90 1.80 1.70

SEK & 3m STIBOR

9.0 1.50

8.8 8.6 8.4

19Nov 7-Dec
3m ra.

1.40 1.30 1.20

EURSEK

27Dec

Headquarters 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

+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 62 96 80 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

Morning Report
28.12.2012

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 1.00 0.50 0.00 19-Nov
7-Dec

94 92 90 27-Dec
$/b

NOK TWI ra.

EUR vs GBP & CHF 1.22 1.21 1.20 1.19 19Nov 7-Dec
GBP r.a

0.84 0.82 0.80 0.78 27Dec

CHF

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

Prior 86.11 1.324 0.822 1.209 7.382 8.618 7.460 5.577 6.482 0.859 8.980 6.510 7.561 1.168 10.477

Last 86.46 1.324 0.822 1.209 7.380 8.618 7.460 5.574 6.450 0.858 8.988 6.509 7.531 1.168 10.493

% 0.4% 0.0% 0.0% -0.1% 0.0% 0.0% 0.0% -0.1% -0.5% -0.1% 0.1% 0.0% -0.4% 0.1% 0.2%

In 1 m ...3 m 82 81 1.27 1.25 0.80 0.79 1.20 1.20 7.30 7.25 8.65 8.60 7.45 7.45 5.75 5.80 7.01 7.16 0.84 0.84 9.1 9.1 6.81 6.88 5.59 5.57 1.18 1.19 10.81 10.82

...6 m ...12 m 81 82 1.25 1.30 0.79 0.80 1.20 1.20 7.25 7.40 8.60 8.70 7.45 7.45 5.80 5.69 7.16 6.94 0.84 0.85 9.1 9.1 6.88 6.69 5.57 5.49 1.19 1.18 10.82 10.73

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

USD 1.0376 0.9952 0.9131 18.97 5.6340 1.6121 7.7517 127.99 0.2816 2.6079 0.5271 0.8202 3.0793 1.2236 30.3268

% -0.06% -0.02% -0.04% -0.03% -0.04% 0.13% -0.01% -0.02% 0.06% -0.07% -0.04% -0.12% -0.17% 0.04% -0.14%

EURSEK & OMXS

9.0 8.8 8.6 8.4 19-Nov 550

500 7-Dec
450 27-Dec
EURSEK

OMXS ra.

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

NIBOR Prior 1.84 1.87 1.99 2.14 2.23 2.53 2.85 3.20

SWAP AND MONEYMARKET RATES STIBOR EURIBOR Last Prior Last Prior 1.89 1.28 1.27 0.05 1.87 1.30 1.30 0.13 2.00 1.39 1.39 0.22 2.14 1.51 1.50 0.33 2.24 1.33 1.32 0.49 2.53 1.53 1.53 0.77 2.85 1.81 1.79 1.13 3.19 2.07 2.07 1.58

Last 0.06 0.13 0.22 0.33 0.50 0.79 1.15 1.60

USD LIBOR Prior 0.21 0.31 0.51 0.69 0.50 0.87 1.27 1.78

Last 0.21 0.31 0.51 0.69 0.51 0.86 1.29 1.80

Gov. Bonds, 10y 1.80 1.60 1.40 1.20 19Nov 7-Dec 27Dec
SEK NOK, ra.

2.30 2.20 2.10 2.00 1.90

10y 10y yield vs bund

NORWAY Prior Last 98.37 98.40 2.18 0.83 2.17 0.85

GOVERNMENT BONDS SWEDEN GERMANY Prior Last Prior Last 116.65 116.81 101.558 101.55 1.58 0.24 1.57 0.24 1.34 1.33

US Prior 99.01563 1.73 0.39

Last 98.98 1.75 0.42

JPY and Dow Jones 13.5 90 13.0 85 12.5 80 12.0 75 197-Dec 27Nov Dec
USDJPY ra. DowJones, 1000

USD and gold 1800 1700 1600 19Nov 7-Dec 27Dec

Gold

1.35 1.30 1.25 1.20

EURUSD ra.

INTEREST RATE FORECASTS NORWAY SWEDEN GERMANY US 3m nibor 10y sw ap 3m stibor 10y sw ap 3m euribor 10y sw ap 3m libor 10y In 3m 1.90 3.25 1.30 2.25 0.15 1.75 0.35 6m 1.90 3.25 1.30 2.25 0.15 1.75 0.35 12m 1.90 3.50 1.30 2.50 0.15 2.00 0.35 MISCELLANEOUS FRA NOK 3m Prior chg TWI Today % Stock ex. Today MAR 1.86 1.86 0.00 NOK 92.32 Dow Jones 13,096.3 JUN 1.85 1.85 0.00 SEK 114.31 0.04 Nasdaq 2,985.9 SEP 1.87 1.87 0.00 EUR 104.87 - 0.02 S&P 500 1,418.1 DEC 1.92 1.92 0.00 USD 79.66 - 0.05 Eurostoxx50 2,660.0 FRA SEK 3m Prior chg GBP 83.20 Dax 7,655.9 MAR 1.19 1.19 0.00 Comm. Today Last Nikkei225 10,424.2 JUN 1.15 1.15 0.00 Brent spot 111.2 Invalid field(s). Oslo 447.55 SEP 1.14 1.14 0.00 Brent 1m 111.3 110.8 Stockholm 527.83 DEC 1.16 1.16 0.00 Spot gold 0.0 1655.5 Copenhagen 651.11 Sources to all tables and graphics: Reuters and DNB Markets

sw ap 1.75 1.75 2.25

% -0.1% -0.1% -0.1% 0.4% 0.3% 0.0% -0.3% 0.3% 0.2%

Morning Report
28.12.2012
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