Morning Report

02.04.2013

Higher inflation is beneficial to growth

NOK & 3m NIBOR 7.60 1.95 7.50 1.90 7.40 1.85 7.30 1.80 7.20 1.75 28-Feb 14-Mar 02-Apr
EURNOK 3m (rha)

The New York Fed last Friday published a Staff Report challenging conventional wisdom: In the current situation, higher inflation is good for growth, and Fed should allow higher inflation. Over the past three decades conventional wisdom among economists has been that there is no longterm trade-off between inflation and activity/unemployment. The authorities cannot raise activity and lower unemployment by allowing more inflation. Higher inflation affects inflation expectations and thus, in turn, wage claims and firms' output prices, leading to accelerating inflation. Therefore, monetary policy's best contribution to economic stability is to anchor inflation expectations by aiming at low and stable inflation. The Fed's Staff Report maintains that this main result does not hold when a large negative demand shock brings the economy into a "liquidity trap," where interest rates hit the zero lower bound. Then, higher inflation expectations lower real interest rates and raise demand and activity. Thus, it would be opportune to temporarily allow higher inflation by establishing a higher inflation target. In December last year the Feds Open Market Committee stated that it would keep interest rates at zero until the unemployment rate reached 6%, as long as inflation 1-2 years ahead did not exceed percentage points higher than the 2% target. The authors theoretical analysis provides strong support for this strategy. The authors also oppose former Fed Chief Paul Volcker, who tamed the galloping inflation in the US in the early 1980s, and recently warned against allowing higher inflation expectations. The analysis is relevant for the current debate about the effects of central bank massive monetary printing. While exclusively attributed to the authors, it is given an authoritative stamp by being published by the New York Fed. As we have previously stated, slightly higher inflation in conjunction with low nominal interest rates may be opportune to reduce the real value of the post-crisis private and public debt mountains. And the analysis provides theoretical arguments Fed may want to continue its ultraexpansionary monetary policy. It is not obvious that they will succeed in raising actual and expected inflation, however (cf. Japan!). Nor that one will be able to get it back down when interest rates no longer are constrained by the zero lower bound. Many see this as playing with fire. Several key figures were published during the Easter weekend. Yesterday's ISM Index disappointed, with a fall of nearly 3 points to 51.3 in March, compared with an expected 54.1. The sub-indices for new orders and production fell by 6 and 5 points, respectively. However, the index shows manufacturing growing for the fourth month in a row, and all indices except customer inventories are above the 50 level that indicates expansion. Similarly, 14 of 18 industries reported growing activity. Revised figures show that US GDP grew by 0.4% in Q4 (vs. previously reported 0.1%), partly due to growth in construction investments excluding housing was raised from 6% to almost 17% annual rate. Also, the report showed that private sector's operating profits rose by nearly 10% annual rate in Q4. Strong earnings points to higher business investments in the future. In February, consumer spending rose by 0.3% in real terms. Even with no growth in March, consumption will increase by over 3% from Q4 to Q1. Other data were less encouraging. Bank of Japan's Tankan index improved from -12 for the large industrial enterprises in Q4 to -8 in Q1, with an expected -1 in Q2, close to the historical average of -2. But the situation deteriorated somewhat for small and medium businesses, and overall the data show no sign of the economy picking up much speed. Euro zone economic sentiment (ESI) declined slightly in March, pointing to continued activity decline in Q1. On the other hand, German retail sales rose 0.4% in February after a 3% increase in January. This bodes well for Q1 consumption in Europe's largest economy. The weak ISM numbers contributed to an unenthusiastic start to the month in equity markets, with the S&P500 declining 0.4%, and Asian stock markets declining further this morning. Over the Easter weekend, the situation in Cyprus has become more serene, and the euro has appreciated around 1 cent against the USD. The EURUSD now trades around 1.286. There has - unsurprisingly - been little movement in EURNOK, now quoted at 7.47, a cent higher than before the five-day Easter holiday. Today sees the release of Norwegian secondary home prices. We are expecting a seasonally adjusted increase of 0.5% from February to March. oystein.dorum@dnb.no Yesterdays key economic events (GMT) 27/3 MU Sentiment index (ESI) 28/3 USA Private consumption 1/4 USA ISM Todays key economic events (GMT)
06:30 07:58 09:00 Sweden EZ Norway PMI, manufacturing PMI, manufacturing Home prices

Norw ay: 10y Gov't Bond 2.5 110

2.3 2.1
28-Feb
Rate

90 70 02-Apr
Diff (bp, rha)

14-Mar

Headquarter 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 Magnus Vie Sundal

+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 24 16 91 23

As of Mar Feb Mar As of

Mar Mar Mar

Unit Index m/m % Index Unit

Index Index m/m %

Prior 91.1 0.2 54.2 Prior

50.9 46.6 0.5

Poll 90.4 0.4 54.1 Poll

Actual 90.0 0.7 51.3 DNB

51.2 0.5

Morning Report
02.04.2013

3m LIBOR 0.14 0.14 0.13 0.13 0.12 0.12 28-Feb

EUR

0.29 0.29 0.28 14-Mar 0.28 02-Apr

USD(rha)

Oil price & NOK TWI

94 93 92 91 90 113 111 109 107 105 02-Apr
USD/b (rha)

FX 0700 USD/JPY EUR/USD EUR/GBP EUR/DKK EUR/SEK EUR/CHF EUR/NOK USD/NOK JPY/NOK SEK/NOK DKK/NOK GBP/NOK CHF/NOK

Last 94.75 1.2852 0.8477 7.4534 8.3436 1.2193 7.4931 5.8300 6.16 89.86 100.57 8.845 6.149

Today 92.86 1.2869 0.8452 7.4549 8.3324 1.2171 7.4781 5.8104 6.26 89.85 100.32 8.853 6.147

Spot rates and forecasts In 1m Jun-13 Sep-13 Mar-14 FX 0700 -2.0 95 92 95 100 AUD 0.1 1.30 1.32 1.34 1.37 CAD -0.3 0.85 0.85 0.86 0.87 CHF 0.0 7.45 7.45 7.45 7.45 CZK -0.1 8.40 8.40 8.45 8.60 RUB -0.2 1.22 1.22 1.25 1.27 GBP -0.2 7.45 7.40 7.40 7.40 HKD -0.3 5.73 5.61 5.52 5.40 KWD 1.6 6.03 6.09 5.81 5.40 LTL 0.0 88.7 88.1 87.6 86.0 LVL -0.2 100.0 99.3 99.3 99.3 NZD 0.1 8.76 8.71 8.60 8.51 SEK 0.0 610.66 606.56 592.00 582.68 SGD

USD NOK 1.047 6.080 1.015 5.723 0.945 614.437 20.032 29.000 31.120 18.667 1.523 8.848 7.763 0.748 0.285 20.361 2.682 2.166 0.545 10.659 0.841 4.885 6.473 89.742 1.237 4.696

28-Feb

14-Mar

NOK TWI

US dollar

5.9 5.8 5.7 5.6 5.5 28-Feb

1.35 1.30
14-Mar

1.25 02-Apr
EURUSD(rha)

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

Prior 1.84 1.88 1.93 2.11 2.11 2.45 2.79 3.17

Last 1.84 1.88 1.94 2.11 2.09 2.42 2.76 3.14

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

Prior 1.16 1.24 1.32 #N/A 1.53 1.78 2.03 2.29

Interest rates Last USD 1.16 1m 1.24 3m 1.32 6m #N/A 12m 1.53 3y 1.78 5y 2.03 7y 2.29 10y

Prior 0.20 0.28 0.45 0.73 0.53 0.97 1.46 2.04

Last 0.20 0.28 0.44 0.73 0.51 0.92 1.42 1.97

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

Prior 0.06 0.13 0.23 0.43 0.58 0.89 1.23 1.66

Last 0.06 0.13 0.23 0.43 0.59 0.90 1.24 1.66

USDNOK

Japanese yen

100.0 95.0
90.0

7.0 6.0
14-Mar

Norw ay Prior NST475 97.92 10y yld 2.23 - US spread 0.32 3m nibor 1.85 1.85 1.85

85.0 28-Feb
USDJ PY

5.0 02-Apr
JPYNOK(rha)

Norw ay Jun-13 Sep-13 Mar-14

Governm ent bonds Last SEK Prior Last US Prior 98.30 10y 97.04 96.80 10y 100.75 2.19 10y yld 1.81 1.84 10y yld 1.91 0.36 - US spread -0.10 0.00 30y yld 3.15 Interest rate forecasts 10y 10y Sw eden 3m libor USA 3m libor sw ap sw ap 3.25 3.25 3.50 Jun-13 Sep-13 Mar-14 1.20 1.20 1.20 2.25 2.25 2.50 Jun-13 Sep-13 Mar-14 0.35 0.35 0.35

Last Germany Prior Last 101.48 10y 101.51 101.98 1.83 10y yld 1.34 1.29 3.07 - US spread -0.58 -0.55 10y sw ap 2.00 2.00 2.50 3m euribor 0.25 0.25 0.25 10y sw ap 1.75 1.75 2.00

Germany Jun-13 Sep-13 Mar-14

SEKNOK & CHFNOK 91

90
89

88 28-Feb 14-Mar
SEKNOK

6.3 6.2 6.1 6.0 5.9 02-Apr

CHFNOK (rha)

Equities 14700 14500 14300 14100 13900 13700 28-Feb 14-Mar

Dow Jones

485 480 475 470 465 02-Apr

Os lo (rha)

NOK sov. NST20 NST21 NST22 NST471 NST472 NST473 NST475 NST475 NOK FRA JUN SEP DEC MAR

Miscellaneous Prior Last Change Maturity year rem. NOK-index TWI Prior 1.62 1.67 4 18.09.2013 0.46 Last 92.44 92.50 1.56 1.59 4 18.12.2013 0.71 Oil price: (Ldn,cl) 1m 1.64 1.66 2 19.03.2014 0.96 SPOT 109.32 110.80 1.29 1.24 -5 15.05.2015 2.12 Gold price 01.04.2013 PM 1.47 1.42 -4 19.05.2017 4.13 AM: 1603.0 1598.3 1.69 1.63 -6 22.05.2019 6.14 Equities Today 0700 % last 2.23 2.14 -9 24.05.2023 10.15 Dow Jones 14572.85 0.0% 2.23 2.19 -4 24.05.2023 10.15 Nasdaq C. 3239.17 -0.9% 3 mnd 6 mnd NOK NIDR NIBOR FTSE100 6411.74 0.4% 1.84 1.93 1m 1.85 1.84 Eurostoxx50 2624.03 0.0% 1.79 1.90 3m 1.90 1.88 DAX 7795.31 0.0% 1.79 1.91 6m 1.95 1.94 Nikkei 225 12003.43 -1.1% 1.82 1.96 12m 2.15 2.11 OSEBX 471.21 0.7% Sources to all tables and graphics: Thomson Reuters, Thomson Datastream and DNB Markets

Morning Report
02.04.2013
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