Morning Report

01.08.2012

Towards stabilization in China

NOK & 3m NIBOR 7.60 7.50 7.40 7.30
3m ra.

2.40 2.30 2.20 2.10

EURNOK

This morning's PMI indices points towards stabilization in the Chinese manufacturing sector. Today the Fed will round off its monetary policy meeting, and we expect that the statement will show no signs of more QE now. Those who have been waiting for an improvement in economic activity in China will probably have to wait a little longer, if we believe the PMI indices published this morning. The "official" index, published by NBS, showed a marginal decline from June to July. At 50.1, there is still evidence of some expansion in manufacturing, but that is only on the margin. The index is now at its lowest since November last year. Beforehand, it was expected a rise to 50.3, according to Reuters. In a separate publication the "private" PMI index (HSBC) ticked up to 49.3, increasing 1.1 points from June to July. This index has a larger weight of small and medium-sized enterprises than the official index. The HSBC index is thus under 50 for the ninth consecutive month, but now point in the direction that activity is declining somewhat less than before. On the positive side, the production index tilted above 50 in July, while the new orders component is still in a downbeat mode. Together, the two indices indicate that conditions are in the process of stabilizing in China. The authorities have so far this year used monetary and fiscal policy to stimulate growth. They have introduced tax concessions aimed at businesses, reinstated subsidies targeted at purchases of environmental friendly consumer goods, and stimulated investments in transport and public-owned housing through an acceleration of planned projects. In addition, we have seen a shift in monetary policy, with interest rate cuts and lower reserve requirements. This has helped to boost banks' lending capacity and reduce enterprise borrowing costs. In June, we saw signs of this having an effect, as new bank loans rose by 920 billion yuan, 14 percent higher than the average so far in 2012. There is reason to believe that activity will pick up gradually in the third quarter, but to clarify: the days of 10 percent real growth in GDP is history. It still seems that the Chinese are able avoid a further slowdown in activity. GDP growth will most likely accelerate slightly in the second half of 2012 and we project growth to round off at about 8 percent this year. Yesterday's U.S. figures were pretty much on the positive side. Consumer Confidence from the Conference Board rose somewhat surprisingly to 65.9 in July from 62.7 in June. It was expected a decline to 61.5 (Reuters). The increase was driven by a rise in expectations, which rose by 5.7 points to 79.1 in July. This is consistent with an annualized consumption growth of about 1.5 percent, the same as in Q2. This is somewhat below trend, and perhaps a little disappointing in light of the fact that the U.S. households have managed to get their debt ratio down to the lowest level since 2004. Last week we saw that income growth kept a reasonable pace in Q2, but households seem to let this translate into increased savings rather than increased consumption. Figures for consumption, income and savings from June published yesterday showed that real growth in consumption fell by 0.1 percent m/m, while the real income increased by 0.3 percent. Thus, the savings rate increased to 4.4 percent, the highest in 12 months. Uncertainty about the labor market and fears of the fiscal cliff is probably the reason why consumers do not channel income into consumption growth. One factor that may have a positive effect on consumption going forward is that households' housing wealth seems to increase. According to CaseShiller housing price index, house prices rose by 0.9 percent from April to May. This is the fourth consecutive month with an increase, and the index therefore supports the development of other housing market indicators, including housing sales and the FHFA index, that has indicated that conditions in the U.S. housing market are on a positive trend. Despite uncertainty about the public finances which in turn makes households and firms more reluctant to consume and invest, we do not believe that today's statement from the FOMC will give any hints of additional QE. Three weak employment reports in a row has increased the likelihood of more QE, and at the last meeting some of the FOMC members said more easing was necessary to help the economy. Bernanke did, however, give no signs of this in his congressional testimony two weeks ago, and we therefore believe that the Fed will abstain from signaling this today as well. Developments in the markets yesterday seemed to be characterized by lower risk appetite. EURUSD remained about unchanged at 1.23, while EURSEK rose by 0.6 percent and therefore reversed the decrease on Monday. Sovereign yields in the United States and Germany fell, with the latter down 10 bp. In the equity markets development has been mixed with a decline on the Oslo Brs (-0.6%), fall in the S&P500 (-0.4%) and a modest increase in Hong Kong (0.3%). ole.kjennerud@dnb.no Yesterday's key economic events (GMT) 06:00 Germany Retail sales volume 09:00 EMU Unemployment 14:00 USA Consumer conf. CB Todays key economic events (GMT) 09:00 Norway House prices 14:00 USA ISM Manufacturing 18:15 USA Fed policy decision As of Jun Jun Jul As of Jul Jul Unit m/m % % Index Unit m/m, % Index % Prior -0.3 11.2 62.7 Prior 0.2 49.7 0.25 Poll 0.5 11.2 61.5 Poll 0.5 50.2 0.25 Actual -0.1 11.2 65.9 DNB 51.0 0.25

21-Jun 11-Jul 31-Jul

SEK & 3m STIBOR 9.0 8.6 8.2 21-J un 11-Jul

3m ra.

2.20 2.10 2.00 31-Jul

EURSEK

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Morning Report
01.08.2012

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 115 105 95 85 21-J un 11-Jul 96 94 92 90 31-Jul
$/b

NOK TWI ra.

EUR vs GBP & CHF 1.20 0.82 1.20 0.80 1.20 0.78 1.20 1.20 0.76 21-Jun 11-Jul 31-Jul
GBP r.a CHF

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

Prior 78.15 1.230 0.785 1.201 7.427 8.323 7.442 6.043 7.724 0.888 9.483 6.808 8.711 1.129 10.667

Last 78.11 1.231 0.786 1.201 7.425 8.356 7.441 6.031 7.719 0.890 9.448 6.781 8.680 1.125 10.624

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

In 1 m ...3 m 80 84 1.23 1.30 0.79 0.83 1.20 1.20 7.60 7.50 8.80 9.00 7.45 7.45 6.18 5.77 7.72 6.87 0.86 0.83 9.6 9.0 7.15 6.92 5.72 5.82 1.16 1.20 11.14 10.84

...6 m ...12 m 85 85 1.35 1.40 0.85 0.87 1.20 1.30 7.50 7.60 9.00 9.00 7.45 7.45 5.56 5.43 6.54 6.39 0.83 0.84 8.8 8.7 6.67 6.43 5.67 5.46 1.20 1.18 10.59 10.34

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

USD 1.0509 1.0019 0.9757 20.65 6.0450 1.5673 7.7543 120.67 0.2822 2.8052 0.5659 0.8117 3.3458 1.2452 32.3780

% 0.05% -0.15% -0.09% 0.26% -0.07% -0.04% -0.01% -0.05% 0.01% -0.07% -0.09% 0.32% -0.04% -0.02% 0.48%

EURSEK & OMXS 8.9 8.7 8.5 8.3 21-Jun 11-J ul 550 500 450 400 350 31-Jul

OMXS ra. EURSEK

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

NIBOR Prior 1.88 2.20 2.43 2.56 2.36 2.62 2.90 3.17

SWAP AND MONEYMARKET RATES ST IBOR EURIBOR Last Prior Last Prior 1.88 1.87 1.88 0.10 2.20 2.08 2.09 0.27 2.42 2.31 2.32 0.58 2.54 2.42 2.43 0.75 2.36 1.84 1.85 0.70 2.63 1.95 1.97 1.04 2.89 2.11 2.13 1.39 3.18 2.28 2.30 1.78

Last 0.10 0.26 0.57 0.75 0.70 1.04 1.41 1.80

USD LIBOR Prior Last 0.25 0.25 0.44 0.44 0.73 0.73 0.90 0.89 0.49 0.50 0.79 0.81 1.16 1.18 1.59 1.61

Gov. Bonds, 10y 3.00 2.50 2.00 1.20 1.50 1.00 1.00 21-Jun 11-Jul 31-Jul 1.60 1.40
NOK, ra. SEK

NORWAY Prior Last 10y /A No Data 100.65 10y yield 1.95 1.93 vs bund 0.63 0.63

GOVERNMENT BONDS SWEDEN GERMANY US Prior Last Prior Last Prior 119.21 119.29 104.232 104.11 102.54688 1.39 1.39 1.31 1.31 1.47 0.08 0.08 0.16

Last 102.42 1.49 0.18

13.5 13.0 12.5

JPY and DowJones

81 79 77

12.0 21-Jun

11-Jul

75 31-Jul

USDJPY ra. DowJones, 1000

USD and gold 1670 1620 1.28 1.26 1.24 1570 1.22 1520 1.20 21-Jun 11-Jul 31-Jul
EURUSD ra. Gold

INTEREST RATE FORECASTS NORWAY SWEDEN GERMANY US 3m nibor 10y s wap 3m s tibor 10y swap 3m euribor 10y swap 3m libor 10y s wap In 3m 2.40 3.50 2.10 2.50 0.50 2.25 0.50 2.25 6m 2.50 3.75 2.05 2.75 0.50 2.75 0.50 2.50 12m 2.85 4.25 2.20 3.00 0.50 3.25 0.50 3.00 MISCELLANEOUS FRA NOK 3m Prior chg TWI Today % Stock ex. Today % SEP 2.07 2.07 0.00 NOK 92.86 0.10 Dow Jones 13,008.7 -0.5% DEC 1.90 1.89 0.01 SEK 111.45 - 0.08 Nasdaq 2,939.5 -0.2% MAR 1.87 1.87 0.00 EUR 97.20 - 0.24 FTSE100 5,635.3 -1.0% JUN 1.89 1.88 0.01 USD 82.78 0.10 Eurostoxx50 2,325.7 -0.6% FRA SEK 3m Prior chg GBP 84.60 0.6 Dax 6,772.3 0.0% SEP 2.04 2.02 0.02 Comm. Today Last Nikkei225 8,641.9 0.0% DEC 1.85 1.83 0.01 Brent spot 106.7 106.7 Oslo 423.31 -0.6% MAR 1.76 1.74 0.02 Brent 1m 104.9 104.9 Stockholm 501.59 0.1% JUN 1.73 1.70 0.03 Spot gold 0.0 1622.0 Copenhagen 630.39 -0.2% Sources to all tables and graphics: Reuters and DNB Markets

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