Morning Report

04.01.2013

Positive surprise from payrolls today?

NOK & 3m NIBOR
7.50 2.00

Yesterday's ADP report showed that employment in the U.S. rose by 215,000 in December. This paves the way for a positive surprise from non-farm payrolls today. Yesterdays minutes from the Fed surprised markets and contributed to a more pessimistic mood. Analyzing the US labor market has been an interesting exercise after the financial crisis in 2008-09. On the one hand the economy has moved forward at a sub-trend pace, with actual growth being lower than the perceived trend growth. On the other hand the unemployment rate has declined to 7.7 percent this winter, after peaking at 10 percent in the autumn of 2009. Normally growth in GDP has to exceed growth in potential output for the unemployment rate to decline. Thus, the decline in the unemployment has been somewhat puzzling for many of those who follow the US economy. One explanation for why the unemployment rate has declined more than output growth would normally have suggested, may be that the financial crisis has led to a decline in the growth in potential output, which has been assumed to be around 2-2.5 percent. In part this can be explained by the massive buildup of long-term unemployment. From 1970 until 2007 there were between 1 and 2 million long-term unemployed in the United States. During the crisis, this figure more than tripled, and still there are well over twice as many long-term unemployed as was usual prior to the financial crisis. High proportion of long-term unemployment undermines human capital and mobility in the labor market, which in turn reduces the supply of skilled labor and thus leads to lower productivity in businesses. In addition productivity may have declined as a result of firms' willingness to invest having fallen since the financial crisis. As noted in this report earlier this week, corporate profits have grown to record levels in 2012. Despite this, investment growth has been low. Whether this is due to uncertainty about the fiscal cliff, the crisis in the Eurozone or other reasons is really irrelevant in this context. The bottom line is that the financial crisis may have contributed to a deterioration of quality of production inputs - ie labor and capital with in turn has a negative effect on productivity and trend growth. And when productivity first has fallen, companies must increase their workforce more than they otherwise would have done to achieve a given production target. Therefore, it is possible that the labor market continues to improve even if the economic recovery were to be somewhat weak. Yesterday we got an indication of just that. The ADP report, which gives a good indication of the growth in employment reported by the BLS, showed that employment increased by 215,000 from November to December. In addition the November numbers were revised up by 30 000. We estimate that today's report from the BLS will show that employment rose by 175,000 in December. This marks an increase of 53,000 from November, when employment rose by 146,000. Consensus is slightly lower at 150,000, according to Reuters. Yesterday's markets showed signs of having taken a pause after a few days with optimism this week. Trade in the European session was mostly flat with relatively small changes in interest and exchange rates. But in the US trading session, the picture changed after the Fed released the minutes from the monetary policy meeting on 11 and 12 December. At the meeting, the Fed announced that its asset purchase program would be extended from $40 billion to $85 billion per month. The increase came as a result of the expiration of Operation Twist in December and was expected beforehand. But yesterday's minutes showed that several members of the FOMC want to end the Feds QE program faster than expected. While "some" members do not reveal any preference for how long they prefer QE3 to last, "some members prefer to end the program by year-end. But "several" members wants to slow or stop well before the end of 2013, due to concerns about financial stability and the size of the Feds balance sheet. Despite this the most likely outcome is that the Fed will continue its QE3 program as long the Fed sees it as warranted that is, as long as the economy needs the additional pull from monetary policy through QE. But the fact that several member might prefer that QE3 may be short-lived contributed to a broadbased dollar strengthening. EURUSD has fallen by 0.8 percent since yesterday morning, while GBPUSD has fallen 0.9 percent. Also the Norwegian krone depreciated against the greenback, with USDNOK up 0.3 percent. The minutes also led to a rise in US Treasury yields, with the 10-year yields up nearly 10 points over the last 24 hours. US equities ended in red, despite a positive start on the day. ole.kjennerud@dnb.no Yesterdays key economic events (GMT) 07:00 Norway PMI - manufacturing 07:55 Germany Unemployment, change 12:15 USA ADP Unemployment Todays key economic events (GMT) 09:00 EMU CPI, flash 12:30 USA Payrolls 12:30 USA Unemployment As of Dec Dec Dec As of Dec Dec Dec Unit Index 1000 m/m Unit y/y % m/m % Prior 50.2 5 148 Prior 2.2 146 7.7 Poll 50.0 10 138 Poll 2.1 150 7.7 Actual 50,0 3 215 DNB 175

7.40 7.30 7.20

26Nov
3m ra.

1.90 1.80 1.70

14Dec 03Jan
EURNOK

SEK & 3m STIBOR

9.0 8.8 8.6 8.4 8.2 26Nov
3m ra.

1.60

1.40 1.20
14Dec

1.00 03-Jan
EURSEK

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
04.01.2013

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 1.00 0.50 0.00 26-Nov
14-Dec

94 92 90 03-Jan
$/b

NOK TWI ra.

EUR vs GBP & CHF 1.22 1.21 1.20 1.19 26Nov

GBP r.a

0.83 0.82 0.81 0.80 0.79 14Dec 03Jan

CHF

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

Prior 87.24 1.305 0.810 1.210 7.292 8.526 7.459 5.588 6.404 0.855 9.015 6.537 7.493 1.170 10.521

Last 88.11 1.301 0.811 1.209 7.291 8.523 7.460 5.604 6.366 0.856 9.004 6.554 7.442 1.170 10.522

% 1.0% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% -0.6% 0.0% -0.1% 0.3% -0.7% 0.0% 0.0%

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 1.0438 0.9906 0.9296 19.45 5.7357 1.6054 7.7520 130.04 0.2824 2.6541 0.5373 0.8236 3.1590 1.2300 30.4250

% -0.29% 0.26% 0.30% 0.40% 0.29% -0.34% 0.01% 0.31% 0.01% 0.27% 0.37% -0.57% 0.65% 0.30% 0.53%

EURSEK & OMXS

9.0 8.8 8.6 8.4 8.2 26-Nov 550

500 14-Dec
450 03-Jan
EURSEK

OMXS ra.

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

NIBOR Prior 1.73 1.82 1.97 2.13 2.24 2.56 2.87 3.22

SWAP AND MONEYMARKET RATES STIBOR EURIBOR Last Prior Last Prior 1.73 1.24 1.22 0.05 1.81 1.28 1.26 0.13 1.97 1.38 1.36 0.22 2.12 1.49 1.48 0.33 2.25 1.37 1.39 0.56 2.58 1.64 1.65 0.89 2.89 1.90 1.90 1.26 3.25 2.18 2.19 1.72

Last 0.05 0.13 0.22 0.33 0.56 0.90 1.27 1.73

USD LIBOR Prior 0.21 0.31 0.51 0.68 0.52 0.93 1.39 1.93

Last 0.21 0.31 0.50 0.68 0.54 0.96 1.42 1.96

Gov. Bonds, 10y 1.80 1.60 1.40 1.20 26Nov 14Dec 03Jan
SEK NOK, ra.

2.30 2.20 2.10 2.00 1.90

10y 10y yield vs bund

NORWAY Prior Last 98.6 98.20 2.15 0.69 2.20 0.70

GOVERNMENT BONDS SWEDEN GERMANY Prior Last Prior Last 115.68 115.74 100.228 100.08 1.68 0.22 1.68 0.18 1.46 1.49

US Prior 97.4375 1.91 0.45

Last 97.30 1.94 0.45

JPY and Dow Jones 13.5 90 13.0 85 12.5 80 12.0 75 261403-Jan Nov Dec
USDJPY ra. DowJones, 1000

USD and gold 1800

1700

1600 26Nov 14Dec 03Jan

1.34 1.32 1.30 1.28 1.26

EURUSD ra.

Gold

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 1.85 1.85 -0.01 NOK 91.17 0.03 Dow Jones 13,391.4 JUN 1.85 1.85 0.00 SEK 113.27 - 0.13 Nasdaq 3,100.6 SEP 1.90 1.89 0.01 EUR 103.78 - 0.09 S&P 500 1,459.4 DEC 1.92 1.93 -0.01 USD 80.77 0.36 Eurostoxx50 2,701.2 FRA SEK 3m Prior chg GBP 0.00 - 100.0 Dax 7,756.4 MAR 1.22 1.18 0.04 Comm. Today Last Nikkei225 10,688.1 JUN 1.17 1.17 0.00 Brent spot 114.1 Invalid field(s). Oslo 455.26 SEP 1.17 1.18 -0.01 Brent 1m 111.3 112.1 Stockholm 537.82 DEC 1.21 1.22 -0.01 Spot gold 0.0 1679.5 Copenhagen 665.02 Sources to all tables and graphics: Reuters and DNB Markets

sw ap 1.75 1.75 2.25

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

Morning Report
04.01.2013
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