Morning Report

22.01.2013

BoJ lifted the inflation target

NOK & 3m NIBOR 7.60 1.88 1.86 7.50 1.84 7.40 1.82 7.30 1.80 7.20 1.78 19-Dec 08-Jan 22-Jan
EURNOK 3m(rha)

At the monetary policy meeting the Japanese central bank decided to raise the inflation target from 1% to 2%. In addition, a significant increase in the purchase of short-term government securities was announced, but this will not commence until 2014. The adjustments provided little impact on financial markets. As expected Bank of Japan made major adjustments to the monetary policy framework at the meeting this morning. In line with the recommendations of the new Prime Minister (Abe), the inflation target (which is now called "price stability target") increased from 1% to 2%. The Bank argues that the increase of the target will also ensure that the inflation rate increases, as a result of a proposed strengthening of competitiveness and higher potential growth rates for the Japanese economy. (That said, however, little is known about how the target will contribute to increased productivity). The forecasts of the central bank show that inflation is actually going to increase: In fiscal year 2013 projected an inflation of 0.4%, while it is expected to increase to 2.9% in 2014. The rise in inflation is due, however, almost exclusively to the approved increase in VAT from 5% to 8% in April 2014, and not due to a higher inflation target. The BoJ forecasts as presented in October last year was virtually identical to the present estimates. The VAT will be raised further to 10% in 2015 and this will help raise the inflation rate this year as well. However, the effects from higher VAT will nevertheless prove temporary. Two of the nine members in the committee voted against raising the inflation target. In addition to raising the target, BoJ also decided to scale up the quantitative easing. From 2014 BoJ will purchase securities for a total of around 13 trillion yen per month. These are divided into 2 trillion in purchases of government bonds and 10 trillion billion in T-bills. As of today, they buy government bonds for 2.1 trillion (gross) per month within the so-called Asset Purchase Program (APP). This program will be completed by the end of this year. The adopted scale-up will not take effect until next year. Within the new program there is not set any maximum amount or completion date, and this therefore has the character of being "open ended", in line with the Fed's present quantitative easing. The impact of the yen has so far been small, indicating that the adjustments of monetary policy were not particularly surprising. In the absence of major events this week, it may be useful to focus on news from the U.S. housing market. This afternoon the figures for existing home sales are released, tomorrow the FHFA house prices data are due, on Thursday mortgage rates and refinancing numbers will be released, and Friday the data for new home sales will be released. The numbers will probably show that the housing market continued to improve in December, which may be a good prelude to the development this year. Normally, the housing market plays a key role in U.S. economic upturns. Strong growth in residential investment typically means that GDP growth is strong in the early recovery phase. This did not happen in this recovery. GDP growth has been weak, and the housing market has remained lackluster, as a result of significant overinvestment in the 2000s. Now the correction phase seems completed over, and the market again shows signs of recovery. This is an important reason why we expect GDP growth in the U.S. to become 2.5% this year. By comparison the consensus view is 2.0%. The best indicator of trends in the housing market is likely the NAHB index, which measures the sentiment among home builders. Last week the index for January showed an unchanged level at 47, indicating that it is now nearly a balance between pessimists and optimists. A year ago, the level was only 25 and the bottom (at 13) was reached in autumn 2010. The sharp improvement over the past year indicates that housing investment will pick up in the coming year. It normally takes about a year from NAHB index increases until we see a pick up in residential construction. Residential investment accounts for only 2.5% of U.S. GDP, while the long-term average is 4.5%. Our somewhat cautious projections (relative to the NAHB index) imply an increase in investment of 20% this year and 30% next year. If we are right, this will help to raise GDP growth by 0.6%-points this year and 0.9%-points next year. This will lift the investment ratio up towards the long-term average. We also expect that prices will continue to rise. The affordability index shows that homes now appear very cheap, also taking into account borrowing costs and revenues. Actual prices must rise by 50% to bring the price level back to normal. Further increase in prices will also have self-reinforcing effects from increased refinancing activity and an increase in household wealth. knut.magnussen@dnb.no Yesterdays key economic events (GMT) 07:00 Germany Producer Prices US Markets closed Todays key economic events (GMT) 10:00 Germany ZEW 11:00 UK CBI Orders 15:00 USA Existing Home Sales As of Dec As of Jan Jan Dec Unit m/m % Unit Index Index mn Prior -0.1 Prior 6.9 -12.0 5.040 Poll 0.0 Poll 12.0 -11.0 5.100 Actual -0.3 DNB

Norsk 10y sov.

2.6 2.4 2.2 2.0 1.8 19-Dec
rente

08-Jan

100 80 60 40 20 0 22-Jan
Diff(bp,rha)

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
22.01.2013

3m LIBOR
0.15 0.14 0.13 0.12 0.11 19-Dec
EUR

08-Jan

0.32 0.31 0.31 0.30 0.30 22-Jan

USD(rha)

NOK & 3m NIBOR 7.60 1.88 1.86 7.50 1.84 7.40 1.82 7.30 1.80 7.20 1.78 19-Dec 08-Jan 22-Jan
EURNOK 3m(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 89.55 1.3316 0.8395 7.4634 8.6848 1.2445 7.4648 5.6057 6.26 86.04 100.00 8.895 5.998

Today 89.19 1.3366 0.8427 7.4633 8.6751 1.2447 7.4537 5.5757 6.25 85.94 99.85 8.840 5.991

Spot rates and forecasts In 1m Apr-13 Jul-13 Jan-14 FX 0700 -0.4 88 90 91 93 AUD 0.4 1.33 1.32 1.36 1.37 CAD 0.4 0.82 0.81 0.85 0.86 CHF 0.0 7.45 7.45 7.45 7.45 CZK -0.1 8.65 8.65 8.60 8.70 RUB 0.0 1.20 1.20 1.20 1.20 GBP -0.1 7.30 7.25 7.25 7.40 HKD -0.5 5.49 5.49 5.33 5.40 KWD -0.1 6.24 6.10 5.86 5.81 LTL -0.1 84.4 83.8 84.3 85.1 LVL -0.1 98.0 97.3 97.3 99.3 NZD -0.6 8.90 8.95 8.53 8.60 SEK -0.1 608.33 604.17 604.17 592.00 SGD

USD NOK 1.056 5.884 0.992 5.622 0.931 598.657 19.142 29.123 30.171 18.477 1.586 8.842 7.753 0.719 0.282 19.791 2.583 2.158 0.522 10.680 0.841 4.689 6.490 85.895 1.226 4.545

US dollar

5.7 5.6 5.5 5.4 19-Dec

1.35 1.30
08-Jan

1.25 22-Jan
EURUSD(rha)

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

Prior 1.80 1.85 1.97 2.19 2.28 2.60 2.88 3.23

Last 1.80 1.86 1.98 2.21 2.28 2.59 2.89 3.23

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

Interest rates Prior 0.20 0.30 0.48 0.81 0.49 0.90 1.36 1.89

Last 0.20 0.30 0.48 0.81 0.49 0.87 1.33 1.85

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

Prior 0.06 0.14 0.25 0.47 0.70 1.01 1.34 1.74

Last 0.05 0.13 0.25 0.47 0.70 1.03 1.35 1.75

USDNOK

Japanese yen

95.0 90.0
85.0

8.0 7.0
08-Jan

Norw ay NST475 10y yld - US spread

Prior 96.49 2.39 0.55

Last 96.10 2.43 0.57

Governm ent bonds US Prior Last 10y 98.08 97.84 10y yld 1.84 1.86 30y yld 3.02 3.06 Interest rate forecasts US 3m libor 10y sw ap Apr-13 0.35 2.00 Jul-13 0.35 2.00 Jan-14 0.35 2.25

Germany 10y 10y yld - US spread

Prior 99.48 1.56 -0.28

Last 99.09 1.60 -0.27

80.0 19-Dec
USDJ PY

6.0 22-Jan
JPYNOK(rha)

Norw ay Apr-13 Jul-13 Jan-14

3m nibor 1.85 1.85 1.85

10y sw ap 3.25 3.25 3.50

Germany Apr-13 Jul-13 Jan-14

3m euribor 10y sw ap 0.25 1.75 0.25 1.75 0.25 2.00

SEKNOK & CHFNOK 87 86 85 84 83 19-Dec 08-Jan

SEKNOK CHFNOK(rha)

6.2 6.1 6.0 5.9 5.8 22-Jan

Equities
14200 13700 13200 12700 12200 19Dec 08-Jan
Dow J.I.

470 460 450 440 430 22-Jan

Os lo(rha)

NOK sov. NST19 NST20 NST21 NST471 NST472 NST473 NST475 NST475 NOK FRA MAR JUN SEP DEC

Miscellaneous Prior Last Change Maturity year rem. NOK-index TWI Prior 2.31 2.32 2 19.06.2013 0.41 Last 91.17 91.50 1.89 1.89 1 18.09.2013 0.65 Oil price: (Ldn,cl) 1m 1.88 1.69 -19 18.12.2013 0.90 SPOT 112.85 112.06 1.52 1.52 0 15.05.2015 2.31 Gold price 21.01.2013 PM 1.75 1.76 1 19.05.2017 4.32 AM: 1688.5 1687.5 1.93 1.96 3 22.05.2019 6.33 Equities Today 0700 % last 2.37 2.39 2 24.05.2023 10.34 Dow Jones 13649.70 0.4% 2.39 2.43 4 24.05.2023 10.34 Nasdaq C. 3134.71 0.0% 3 mnd 6 mnd NOK NIDR NIBOR FTSE100 6180.98 0.4% 1.87 2.02 1m 1.87 1.80 Eurostoxx50 2726.63 0.6% 1.89 2.05 3m 1.98 1.86 DAX 7748.86 0.6% 1.94 2.09 6m 2.10 1.98 Nikkei 225 10709.93 -0.4% 2.00 2.16 12m 2.30 2.21 OSEBX 467.97 0.1% Sources to all tables and graphics: Thomson Reuters, Thomson Datastream and DNB Markets

Morning Report
22.01.2013
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