Weekly Focus Fiscal cliff negotiations will go to the edge doc

www.danskeresearch.com Investment Research Market movers ahead • Market attention is likely to centre on the fiscal cliff negotiations, as the deadline is moving closer. President Barack Obama and House speaker John Boehner still have five days after Christmas to strike a deal but it is possible that the US will go ‘over the cliff’. • We expect some improvement in the ISM and a decent employment figure, when these are released in the first week of the new year. Global update • Data in the euro area has started to surprise on the upside. This week it was the German ifo figures that signalled improvement going forward. • The Liberal Democratic Party won a landslide victory in Japan. The new prime minister’s first priority will be to push Japan out of recession with additional fiscal easing and increased pressure on the Bank of Japan for more aggressive QE. • The Riksbank cut the leading interest rate by 25bp to 1% as expected. Looking ahead, we expect the Riksbank to deliver another rate cut in April. • Norges Bank kept rates unchanged. We expect Norges Bank to hike rates twice in the course of 2013. Focus • Nordic Outlook - December 2012, 20 December. The Nordics are all true triple-A characterised by strong fundamentals. • Denmark is heading for moderate growth – a fully fledged recovery is a long way off. The Swedish economy is set for lower growth and we expect unemployment to increase due to weakness in exports. • Norway is still growing at a strong rate but the non-oil industry is under pressure and the housing market is beginning to give cause for concern. Finland is on the verge of recession and growth is not likely to pick up much in the near future. • We wish all our readers a Merry Christmas and a Happy New Year Euro area leading indicators have bottomed US employment is improving 98 00 02 04 06 08 10 12 25 30 35 40 45 50 55 60 65 -75 -50 -25 0 25 50 75 100 125 Index Index << ZEW expectations Ifo expectations (minus 50) >> PMI manufacturing >> 00 02 04 06 08 10 12 -800 -600 -400 -200 0 200 400 -800 -600 -400 -200 0 200 400 1000 persons 1000 persons MoM Private payrolls, 3 mth avg. Source: Reuters EcoWin, Danske Bank Markets Source: Reuters EcoWin, Danske Bank Markets 21 December 2012 Important disclosures and certifications are contained from page 21 of this report. Editors Allan von Mehren +45 4512 8055 alvo@danskebank.dk Steen Bocian +45 45 12 85 31 steen.bocian@danskebank.dk Weekly Focus Fiscal cliff negotiations will go to the edge Contents Market movers ahead 2 Global Update 6 Scandi update 8 EMEA Update 9 Latest research from Danske Bank 10 Rates: The outlook for 2013 11 FX: More dollar and yen weakness in 2013 12 Credit: Happy (Holi)days 13 Financial views 14 Macroeconomic forecast 16 Financial forecast 17 Calendar – Key Data and Events in Week 52 18 Calendar – Key Data and Events in Week 1 19 Financial views Major indices 21-Dec 3M 12M 10yr EUR swap 1.62 1.75 2.15 EUR/USD 132 134 132 21-Dec 6M 12-24M S&P500 1444 -5% to +5% 5%-10% Read more on Page 17 Source: Danske Bank 2 | 21 December 2012 www.danskeresearch.com Weekly Focus Weekly Focus Market movers ahead Global Two releases will dominate the US calendar in the next two weeks – the ISM manufacturing index and the December employment report • The employment report is due for release Friday after New Year and includes both the , both released after New Year. The Markit PMI has been above the ISM in the last couple of months and the flash PMI increased substantially in December. It will be interesting to see if the ISM index increases to reduce this gap. We expect at least some improvement in the ISM but we need some more data to make our final estimate. The ISM report should also bring some indications of how the fiscal cliff debate has affected business sentiment. change in payrolls and the unemployment rate • Also of very high interest in the first week of 2013 is the release of the . The distortions from Hurricane Sandy seem to have faded and the jobless claims are now below their pre-Sandy level. This indicates that we should get another decent employment report with a relatively large addition to payrolls. minutes from the December FOMC meeting • Between Christmas and New Year’s eve there are only few releases with the . As the FOMC at the December meeting introduced numerical threshold values for inflation and unemployment to be used as an interest rate tool, the minutes will be of special interest. They should give some insight in how the threshold values have been decided and what considerations different members of the committee have made. Conference board consumer confidence • Finally and possibly the most interesting, the US will go over the as the most interesting one. We expect consumer confidence to fall from 73.7 to 70.0, thereby mirroring the drop in the Michigan measure of consumer sentiment. Consumer sentiment is likely to be affected by the fiscal cliff negotiations, where the outcome might be an increase in income taxes. fiscal cliff • In the euro area little is happening during the Christmas holiday. German on 31 December if no agreement is reached. We will therefore follow the negotiations to see if a solution is found before the deadline. retail sales are expected to have improved decently in November after a sharp October decline. French final Q3 GDP figures are released on 28 December. No surprise outcome expected. A Christmas speech by Merkel is broadcast on 25 December and a new year speech on 31 December. Next year we start out with final December PMIs, which are expected to confirm signs of modest improvement. German and euro area inflation data will probably not be that exciting as ECB governor Mario Draghi shows little concern about inflation and all data signal that he has no reason to be – at least for now. We might see a pick-up in German core inflation in the medium term though, as money growth has gained substantial momentum. Euro area M3 might send more signals of a pick-up in growth. German unemployment may have stabilised in December after eight consecutive months of increasing unemployment. Money growth signals growth pick-up 96 98 00 02 04 06 08 10 12 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 -13 -9 -5 -1 3 7 11 15 19 % y/y % q/q M1 growth, 6 month lead Euro area GDP Source: Reuters EcoWin Will ISM close the gap? 08 09 10 11 12 13 30 35 40 45 50 55 60 30 35 40 45 50 55 60 Index ISM Markit Flash PMI Index Source: Reuters EcoWin Employment on the way up 00 02 04 06 08 10 12 -800 -600 -400 -200 0 200 400 -800 -600 -400 -200 0 200 400 1000 persons 1000 persons MoM Private payrolls, 3 mth avg. Source: Reuters EcoWin German unemployment increased '000 persons Jan Apr Jul Sep Dec Mar Jun Sep 11 12 -50 -40 -30 -20 -10 0 10 20 -50 -40 -30 -20 -10 0 10 20 Source: Reuters EcoWin 3 | 21 December 2012 www.danskeresearch.com Weekly Focus Weekly Focus • In China the main focus will be the manufacturing PMI, which we expect to confirm growth in manufacturing activity. The flash estimate for HSBC manufacturing PMI already released improved to 50.9 in December from a final reading of 50.5 in November. It should be remembered that the sample used for the December flash estimate was collected very early in December and was relatively small and for that reason we would not be surprised if the final estimate for the HSBC manufacturing PMI is revised higher. We expect the NBS manufacturing PMI • Focus in Japan will be on the political developments after the landslide victory for the Liberal Democratic Party (LDP) in connection with the Lower House election last weekend. The new prime minister and the new LDP-led government will be inaugurated on 26 December and in the financial markets there will be particular interest in who will get the economic portfolio in the new government. Former prime minister Taro Aso is rumoured to be Abe’s first choice as finance minister. A flood of economic data for November will also be released between Christmas and New Year. We expect in December to improve 51.3 from 50.6 in November, broadly in line with the HSBC manufacturing PMI. industrial production to decline -1.1% m/m in November after increasing 1.6 m/m in the previous month. Production plans suggest that industrial production will recover markedly in December, so the overall picture is that industrial production has started to stabilise in late 2012. This should also be evident in the JMMA/Markitt manufacturing PMI, which we expect to stabilise in December. However, we expect the labour market data for November to be weak as the contraction in GDP in Q3 and Q4 increasingly weighs. CPI inflation Scandi is also expected to ease from 0.0% y/y to -0.1% y/y underscoring that Japan is still far from achieving its current inflation target. • In Denmark the first Friday of the New Year brings figures for gross unemployment. We do not think growth is currently high enough to stabilise the labour market and therefore expect an increase of 1,000 to 166,500. The same day brings figures for the Nationalbank’s foreign exchange reserves, which will be interesting to follow because the bank is expected to intervene to the tune of DKK5-20bn before raising rates unilaterally. The data will thus give an indication of whether a rate increase is imminent. The previous day sees the release of manufacturing sentiment • There will be another batch of important Swedish data over the next two weeks. November , which we expect will fall from 2 in November to 0 in December, pulled down primarily by non- oil exports and industrial production, both of which have fallen in the last two releases. trade balance and retail sales • After New Year, December both have bearing on Q4 GDP and should serve to confirm negative growth (q/q). Plunging December consumer confidence suggest that retail sales may be quite weak. The chart shows higher perceived risk of being unemployed (red line) against retail sales growth (blue). The key issue with these figures is whether they indicate that growth will be in line with the Riksbank forecast (-0.2 % q/q) or not. We forecast a weaker number, hence expect some support for that view. manufacturing and services PMI • are released. German manufacturing PMI has stabilised, implying the very depressed Swedish ditto may show some upward correction. Swedish services PMI also appears set for a small upward correction. The uncertainty here is whether the sagging labour market will continue to weigh on this sector. Manufacturing PMIs is expected to improve further in December 07 08 09 10 11 12 40 45 50 55 60 -4 -2 0 2 4 6 8 << HSBC manf. PMI % 3m/3m << NBS manf. PMI Diffusion Industrial production >> Source: Danske Bank Markets • Unemployment expected to increase given the current growth outlook 07 08 09 10 11 12 60 80 100 120 140 160 180 60 80 100 120 140 160 180 ,000 persons ,000 persons Source: Reuters EcoWin Weaker retail sales ahead Source: Macrobond 4 | 21 December 2012 www.danskeresearch.com Weekly Focus Weekly Focus • November household lending • Economic data will be thin on the ground in Norway over the Christmas period. The new year brings the growth is likely to have remained at 4.5 %, where it has flattened out over the past couple of months. This growth rate is still too high to stabilise the household debt ratio, currently at about 170 % of DI and the main restriction on additional monetary easing. PMI Market movers ahead — Week 52 for December, which will give us a better picture of the state of the Norwegian industry at the close of the year. Having been very volatile over the summer, the PMI has stabilised towards the end of 2012, tending towards a gradual brightening of the outlook for Norwegian manufacturers. In November the index moved above the critical level of 50 (separating growth from contraction) for the first time since May. The underlying data were somewhat less encouraging, though, with a fall in the new orders index and a rise in the inventories index. This may mean that the potential for a further increase in the PMI in December is limited. On the other hand, there are signs that global industrial indicators have stabilised or improved in December, potentially reducing the negative contribution from export markets. The domestic market is still being driven by oil-related industries but activity levels, while still high, were probably somewhat lower towards the end of the year. We therefore expect the PMI to be largely unchanged in December at 50.0. Global movers Event Period Danske Consensus Previous Mon 24-Dec Tue 25-Dec Wed 26-Dec 14:30 USD Initial jobless claims 1000 366 361 16:00 USD Consumer confidence Index Dec 70.0 70.0 73.7 16:00 USD New home sales 1000 (m/m) Nov 374 (1.5%) 380 (3.3%) 386 (-0.3%) Thurs 27-Dec 0:15 JPY Markit/JMMA manufacturing PMI Index Dec 46.5 46.5 0:30 JPY Unemployment rate % Nov 4.3% 4.2% 4.2% 0:30 JPY Job-to-applicant ratio Nov 0.79 0.80 0.80 0:30 JPY CPI - national ex. fresh food y/y Nov -0.1% -0.1% 0.0% 0:50 JPY Industrial production, preliminary m/m| y/y Nov -1.1%| 1.6%|-4.5% 8:45 FRF GDP, final q/q|y/y 3rd quarter 0.2%| 0.2%|0.1% 0.2%|0.2% 15:45 USD Chicago PMI Index Dec 53.6 51.0 50.4 16:00 USD Pending home sales m/m Nov 0.0 % -0.5% 5.2% Scandi movers Event Period Danske Consensus Previous Thurs 27-Dec 9:30 SEK Trade balance SEK bn Nov 8.0 9:30 SEK Retail sales s.a. m/m| y/y Nov -1.7%|1.2% Source: Bloomberg and Danske Bank Markets Recovery in industry Source: Reuters EcoWin 5 | 21 December 2012 www.danskeresearch.com Weekly Focus Weekly Focus Market movers ahead — Week 1 Global movers Event Period Danske Consensus Previous Mon 31-Dec 2:45 CNY HSBC manufacturing PMI Index Dec 51.2 50.9 50.5 20:10 DEM Merkel's New Year speech Tue 01-Jan 2:00 CNY NBS PMI manufacturing Index Dec 51.0 51.0 50.6 Wed 02-Jan 10:00 EUR PMI manufacturing, final Index Dec 46.3 46.3 10:30 GBP PMI manufacturing Index Dec 49.0 49.1 16:00 USD ISM manufacturing Index Dec 49.5 Thurs 03-Jan 9:30 SEK Household Lending % Nov 4.5% 4.5% 9:55 DEM Unemployment rate % Dec 6.9% 10:00 EUR M3 money supply y/y Nov 3.5% 3.4% 3.1% 14:15 USD ADP employment 1000 118 20:00 USD Minutes from FOMC meeting Fri 04-Jan 9:55 DEM PMI services, final Index Dec 52.1 52.1 10:00 EUR PMI composite, final Index Dec 47.3 47.3 47.3 10:30 GBP PMI services Index Dec 50.2 50.2 11:00 EUR CPI estimate y/y Dec 2.3% 2.2% 14:30 USD Nonfarm payroll 1000 Dec 146 14:30 USD Unemployment Dec 7.7% 16:00 USD ISM (NAPM) non-manufacturing Index Dec 54.7 Scandi movers Event Period Danske Consensus Wed 02-Jan 8:30 SEK PMI Index Dec 43.2 16:00 DKK Currency reserves DKK bn Dec 512.1 Thurs 03-Jan 9:00 NOK PMI Index Dec 50.1 Fri 04-Jan 9:00 DKK Gross unemployment s.a. K (%) Nov 166.500 (6.4%) 165.500 (6.3%) 9:00 DKK Confidence indicator, industry Index Dec 0 2 Source: Bloomberg and Danske Bank Markets 6 | 21 December 2012 www.danskeresearch.com Weekly Focus Global Update US: Merry Cliffmas Despite progress in negotiations, the US Congress failed to pass legislation that averts the significant fiscal tightening about to hit th e US economy on 1 January if nothing is done. President Obama and House speaker Boehner still have five days after the Christmas holiday to strike a deal but the clock is ticking. Thursday night Boehner dropped a House vote on his so-called Plan B, which included tax hikes for those earning more than USD1m per year, and the Congress has now left for Christmas holiday but will return on December 26. There is still time for Obama and Boehner to reach a comprehensive mega-deal, which includes a solution to the immediate fiscal cliff issue for 2013, a framework for spending cuts over the coming decade and an increase of the debt ceiling about to be hit in February/March next year. However, a just as likely scenario is that we get a mini-deal, which will bridge the fiscal cliff by extending the Bush tax cuts for the majority of American households and indexing the AMT for inflation, but which does not include raising the debt ceiling or a framework for the longer-term budget. This will ease the immediate fiscal blow to US households but will leave political uncertainty high, as politicians will face another round of fierce negotiations in February or March when the debt ceiling becomes binding. Turning to economic data received over the past week, it has generally been good. The housing market continues to show higher activity and rising prices. In the manufacturing sector the December flash PMI jumped to 54.2 from 52.8 and the details were good. This stands in stark contrast to the below-50 reading on the ISM for November. Which of the two surveys is right is too early to say but the jump in the Philly Fed survey for December does suggest that the ISM is likely to move above 50 again in December. Europe: leading indicators signal improvement The data released the past couple of weeks continue to surprise to the upside in the euro area. The euro area surprise index has moved above zero in line with the equivalent index from the rest of the world. This week it was the German Ifo figures that surprised to the upside. The Ifo expectations index jumped to 97.9 in December from 95.2 in November – the highest level since May. This level is slightly below the average value for this index. Ifo current conditions decreased to 107.1 from 108.1. Despite the decrease in the current conditions this index has remained remarkably resilient in terms of the level. Germany avoided recession in Q3 and the leading indicators for Q4 indicate that growth has been stalling and negative growth in Q4 cannot be ruled out. The improvement in Ifo, PMI and ZEW indicate improvement going forward, see also Flash Comment Germany: Ifo points to further improvement, 19 December. The improvement in the leading indicators has weakened the case for an ECB rate cut in January, which we never bought into. US housing activity trending up 85 90 95 00 05 10 0.2 0.4 0.6 0.8 1.0 1.2 1.4 0 10 20 30 40 50 60 70 80 Index Index << New home sales relevative to 5yr moving average NAHB Source; Reuters EcoWin, Danske Bank Economic surprise index is improving in the euro area Source: Macrobond, Danske Bank Markets Leading indicators have bottomed 98 00 02 04 06 08 10 12 25 30 35 40 45 50 55 60 65 -75 -50 -25 0 25 50 75 100 125 Index Index << ZEW expectations Ifo expectations (minus 50) >> PMI manufacturing >> Source: Reuters EcoWin, Danske Bank 7 | 21 December 2012 www.danskeresearch.com Weekly Focus Weekly Focus China: government signals status quo on economic policy In China the Central Economic Work Conference (CEWC) was held 15-16 December. CEWC is a joint meeting between the government and the leadership of China’s Communist Party where the strategy for economic policy for 2013 is discussed. The overall message from CEWC is status quo for macroeconomic policy and more focus on longer-term structural reforms. Monetary policy will remain ‘prudent’, which is Chinese terminology for neutral. Fiscal policy will remain ‘pro-active’, which usually means a moderately loose fiscal policy. The statement from the meeting did not include specific targets for GDP growth and inflation. However, according to press reports, the target for GDP growth will remain unchanged at 7.5% and the inflation target for 2013 will be cut to 3.5% from 4% for 2012. The government will probably not announce the target officially until the National People’s Congress in March 2013. It should be remembered that these targets for growth and inflation should not be regarded as forecasts but rather as critical levels where the government feels it will have to respond with policy adjustments. Japan: landslide LDP victory paves the way for more easing The Liberal Democratic Party (LDP) won a landslide victory in connection with the Lower House election and together with its usual coalition partner, New Komeito, LDP will have a super-majority that allows the Lower House a possible majority in the Upper House on some legislation, see Flash Comment Japan: landslide LDP victory paves the way for Abenomics, 17 December. Hence, LDP will be in a strong position to push through its political agenda. The new prime minister Shinzo Abe’s first priority will be to push Japan out of recession and the new government is expected to announce additional fiscal easing soon after the government has been inaugurated on 26 December. The main weakness with the Abe’s economic strategy is its apparent disregard for longer-term structural economic reforms and consolidation of public finances. If a planned increase in sales taxes in 2014 is postponed, Japan’s rating could be downgraded by the rating agencies. LDP has also been campaigning on more aggressive easing from Bank of Japan (BoJ) and the new government will be in a strong position to influence BoJ through the appointment of two new deputy board governors in March and a replacement for governor Masaaki Shirakawa whose term expires in April. LDP has also opened up for possibly changing the BoJ law to force BoJ to ease more aggressively. BoJ in connection with this week’s monetary meeting expanded its asset purchase programme by JPY10trn to JPY76trn, see Flash Comment Japan: BoJ could raise inflation target at next meeting, 20 December. The implication is that the pace of BoJ’s asset purchases will accelerate slightly to close to 9% of GDP in Q1 13 from about 8% of GDP in Q4 12. For comparison, the Fed’s planned purchases of government bonds and mortgages is expected to be close to 6.5% of GDP in 2013. Hence, monetary policy is already being eased quite aggressively in Japan. In the statement BoJ also said it will discuss the inflation target at its next meeting on 20- 21 January. We now expect the inflation target to be raised from 1% to 2% in connection with that meeting. Status quo in China Monetary Fiscal GDP Inflation 2007 Prudent Prudent 8.0% 3.0% 2008 Tight Prudent 8.0% 4.8% 2009 Loose Proactive 8.0% 4.0% 2010 Loose Proactive 8.0% 3.0% 2011 Prudent Proactive 8.0% 4.0% 2012 Prudent Proactive 7.5% 4.0% 2013 Prudent Proactive 7.5% 3.5% Policy stance Targets Source: Danske Bank Markets Asset purchases poised to accelerate slightly next year 11 12 13 0 2 4 6 8 10 12 0 2 4 6 8 10 12 Pace of asset purcahses % Projected on current announcements % (% of GDP annually) Source: Bank of Japan, Danske Bank Markets 8 | 21 December 2012 www.danskeresearch.com Weekly Focus Weekly Focus Scandi update Denmark – fall in confidence has not hit spending Thursday’s consumer confidence figures showed a fall from -1.3 in November to -4.7 in December. Although the indicator typically falls slightly in December, the decrease was somewhat larger than expected. Nevertheless, private consumption is moving in the right direction: Thursday’s retail sales data for November showed an increase of 0.6% m/m and the same picture emerges from Dankort debit card transactions, which trended upwards in Q4. Finally, we released a new forecast for the Danish economy during the week. We now expect the economy to expand by 0.7% in 2013 and 1.6% in 2014 after contracting by 0.5% this year. This is not, however, expected to be enough to stabilise the Danish labour market in the short term, so we will probably see a decrease in private sector employment in 2013. Sweden – expect another cut from the Riksbank in April The Riksbank cut the repo rate by 25bp to 1.0% as expected earlier this week. The repo path signals an unchanged rate from here and future hikes were again pushed out into the future. The Riksbank justified the cut by arguing that recent economic developments (including inflation) had been weaker than expected and that this weighed more than households’ high debt ratio this time. NIER’s December confidence survey rose slightly on the back of improving sentiment in manufacturing and private services. That said, confidence is still at levels suggesting Q4 GDP growth will be negative with possible spillover to Q1 13. A worrying sign is that consumer confidence plunged in December, probably on the back of the acceleration deterioration of the labour market, which suggests that private spending may be in for a squeeze over the next couple of months. This is also indicated in household spending plans. As downside risks still dominate the economic outlook, we have revised our call on the Riksbank. We now see another 25bp rate in April. Unless there is a very sharp deterioration in economic activity over the next couple of weeks, a February cut seems unlikely as the Riksbank still wants to move very gradually. Norway – nothing new from Norges Bank As expected, Norges Bank left interest rates alone at the year’s last rate-setting meeting. Also, there were no new signals about future interest rates. Indeed, deputy governor Jan Qvigstad said that there was ‘no reason to amend the interest rate projections [from October] and we are still assuming that the first rate increase will come in March, May, June or September’. This was possibly somewhat less aggressive than many had expected given the appreciation of the krone and the rate cut in Sweden. The reason for the bank standing by the interest rate path published in October is quite simply that economic developments have been largely as expected since then. The bank acknowledges that growth in Europe may turn out weaker than it thought but a number of measures have been agreed that could improve the situation. One interpretation of this is that the point estimate for growth in Europe is now somewhat lower but so is the downside risk. The absence of fresh signals from Norges Bank means that we still expect two hikes in Norway in 2013. The biggest risk to our prediction is, of course, further appreciation of the krone. Consumer confidence fell in December 05 06 07 08 09 10 11 12 -20 -15 -10 -5 0 5 10 15 20 -20 -15 -10 -5 0 5 10 15 20 Net. bal. Net. bal. Source: Reuters EcoWin Plunging consumer confidence Source: Macrobond Strong NOK results in low rate Source: Reuters EcoWin 9 | 21 December 2012 www.danskeresearch.com Weekly Focus Weekly Focus EMEA Update Fed , BoJ and BoE to help EMEA markets in 2013 2012 has been a surprisingly good year for the EMEA currencies and particularly the Polish zloty and the Hungarian forint have seen fairly strong gains. We think there are overall two reasons for the fairly positive performance. First of all, the euro crisis – even though certainly not over – has eased somewhat and fears of a disintegration of the European currency union have been reduced. Second and equally if not more important, the Federal Reserve has stepped up monetary easing, which has done quite a bit to improve global risk appetite and that is certainly positive for the EMEA currencies. However, the positive performance of the EMEA currencies has effectively also meant a tightening of monetary conditions in the region and this, combined with very weak growth in most of the eurozone, has hurt EMEA growth over the past couple of months. Fairly strong currencies and weak growth have triggered interest rate cuts across the region in 2012 and we expect more monetary easing in 2013. Growth looks set to recover slowly and inflationary pressures are nowhere to be seen. Looking at 2013 we are fairly optimistic that most of the region’s currencies will do well as the Bank of Japan and the Bank of England are likely to take the lead from the Federal Reserve and step up monetary easing. That should make carry trades attractive – something that certainly will help the EMEA currencies. With currencies likely to remain fairly strong and to potentially get even stronger we expect most EMEA central banks to continue to ease monetary policy. That should eventually help the recovery to get under way in the region but we certainly do not expect a boom in 2013. Concluding, 2013 is likely to be a fairly good year for the EMEA currencies, rates should continue to drop and we are likely to see a moderate recovery in growth across the region. Read our trade recommendations for EMEA markets in 2013 in FX Top Trades 2013, 5 December (page 13 and 14) and in EM Bond Snapshot, 18 December. Chief Analyst Lars Christensen +45 45 12 85 30 larch@danskebank.dk Analyst Stanislava Pravdova +45 45 12 80 71 spra@danskebank.dk 10 | 21 December 2012 www.danskeresearch.com Weekly Focus Weekly Focus Latest research from Danske Bank 20/12 Nordic Outlook - December 2012 Quarterly update on the Nordic economies. 20/12 Flash Comment - Japan: BoJ could raise inflation target at next meeting Bank of Japan at today's monetary meeting raised the ceiling for its asset purchases by JPY10trn to JPY76trn. It now looks increasingly likely that Bank of Japan will raise the inflation target in January. 19/12 Flash Comment: Germany - Ifo points to further improvement The Ifo expectations is rebounding in December and points to further improvement in the coming months 18/12 Flash Comment - Riksbank update The forecast update from the Riksbank released today is a fairly standard style document. In short: temporary weakness in 2013 followed by a gradual return towards trend. Danske Bank's EMU poll: Only one in eight Danes would definitely vote Yes to euro Only one in eight Danes would vote Yes to the euro if a referendum were held today, the lowest since our EMU survey began in 1999. 17/12 Yield Forecast Update - Curve steepening to continue Monthly yield forecast update 17/12 Flash Comment - Japan: landslide LDP victory paves the way for Abenomics The Liberal Democratic Party won a landslide victory in connection with the Lower House election and LDP will be in a strong position to push through its political agenda. [...]... shrink as the banks pay back the LTRO money Source: Macrobond financial # 5: Spread compression to continue The spread normalisation in the European periphery markets is expected to continue The ECB OMT is deemed credible by the markets and Spain and Italy are likely to return to positive growth late next year In the current low rate environment, we expect investors to continue to move into lower credit... is dwindling towards the end of the year In the secondary market it is mainly smaller tickets that are coming through as the larger accounts have largely closed shop for the year The primary market has also gone quiet but is likely to be back with a vengeance in the new year We are still of the view that credit investors are very cash rich and eager to play ball in the primary market in the new year... www.danskeresearch.com Weekly Focus The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgment as of the date hereof These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in the research report... monetary policy, the global cyclical outlook and less tail-risk attached to the euro to support EUR/USD in 2013 Sterling is expected to weaken along USD in 2013 • We are quite negative on JPY The Bank of Japan is turning much softer and the political pressure on the bank to ease monetary policy further is high, not least after the LDP won a landslide victory in the general election We continue to see EUR/JPY... research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report Regulation Danske Bank is authorized and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions... expect an agreement to be reached at the very last minute It should further boost risk sentiment and support the euro and weigh on the US dollar that has gained safe-haven support from the fiscal cliff concerns However, note that a fiscal cliff agreement will be reached has probably now become the consensus view Hence, if we are wrong, we could see significant safe-haven support to USD in the beginning of... central banks will focus on the huge negative output gap in the economy Currently, we are in the lower part of that range, but if the economy improves, as we forecast, then we should move back to the higher end However, we do not expect German or Danish 10-year government bond yields to move above 2% anytime soon # 3: Very long end to remain steep Since June the very long end of the EUR swap curve... On top of that, we have recently seen a strong performance for peripheral eurozone debt, underlining that tail risks for the euro continue to fall day by day We expect this peripheral debt performance to continue in 2013, which everything equal lends support to the euro Hence, we continue to see upside potential for EUR/USD in 2013 One of the key risks for the market at the moment is the fiscal cliff. .. potential in the early part of 2013 If things turn out as they normally do, this will make issuers greedier resulting in a squeeze of new issue premiums after which we are likely to have a minor setback during which the market rebalances The fiscal cliff negotiations are clearly a risk factor that could cause some pain for credit if a solution is not found In terms of news flow, the Norwegian government... rates will remain fairly anchored This implies that the environment for carry and roll down trades in the shorter end of the curve will remain intact Source: Macrobond financial Global government bond returns # 2: No big sell-off in EUR core 10-year segment We believe that the 10-year segment will continue to be range bound through most of H1 13 The recovery is set to remain moderate and central banks will . the fiscal cliff negotiations, where the outcome might be an increase in income taxes. fiscal cliff • In the euro area little is happening during the. www.danskeresearch.com Weekly Focus Weekly Focus • In China the main focus will be the manufacturing PMI, which we expect to confirm growth