Lower interest rate expectations?
Housing Financing Fund (HFF bonds) 1 year
Inflation premium
There was considerable activity on the bond market last week as GDP figures were 9,0% interpreted as a sign of a significant slow down in growth, and CPI figures indicated a drop in inflation pressure. The figures reduced interest rate expectations and the 8,0%nominal yield dropped considerably. RB10, for example, shed 81 bp. RB08-06, on the other hand, remained unchanged, which may be due to the issuance of a new 2- 7,0%year series which increased the supply of T-notes with similar durations. The indexed yield also responded to lower interest rate expectations last week by Energy agreement - a changing medium-term picture?
There was a slight turnaround on Friday when news of an agreement between Alcoa4,0% and the National Power Company was announced, which guaranteed power for the possible enlargement of aluminium smelters in south-west Iceland. In the wake of the announcement yields in the indexed market were up, indicating that this agreement may have raised long-term interest rate expectations. This may also Dec-06 explain Friday's rise on the nominal market.
Treasury notes, 1 year
Reibor rates and Central Bank Repo rates
Inflation premium
Indexed linked bonds
Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 International
International real yield
Real yield difference
Interest rate differential
Difference between ICE-(USA, UK, SEK, FRA, AUS, CAN) Currency market
ISK Trade Weighted Index
Cross rates
A new phase in aluminium investments in sight?
The next aluminium project seems to be on the horizon as Alcan has reached an agreement with the National Power Company, NPC, which almost triples the production capacity of its current plant. Alcan currently operates a 160,000 tonne aluminium plant in Iceland and wishes to expand 95 the smelter by 280,000 tonnes to 460,000 tonnes a year. Construction could start next year
According to our estimates construction work will start in earnest next year, as most preparation work is already in place, and will last until 2010. In Kaupthing Research's view the only piece of unfinished business left is a referendum on the expansion of Alcan's smelter in Hafnarfjordur (a town of 15,000 inhabitants adjacent to Reykjavik). The referendum is scheduled to take place in the first half of next year and feelings are mixed about the expansion. However, Kaupthing Research expects that the outcome of the Sep Sep Oct Oct Oct Oct Oct Oct Nov Nov Nov Nov Nov Dec Dec Dec referendum will not stand in the way of the expansion of the smelter. Exchange rate and turnover
Could delay the Central Bank's monetary easing policy
The Volatility of the ISK
The Alcan plant and the accompanying power projects represent a FDI of 40% 15% of Iceland's GDP in 2006 and thus would have a major impact on aggregate expenditure over the next three years. The project will delay and smooth the Central Bank's cycle of monetary easing that is scheduled to start next year and therefore support the value of the ISK.
Aluminium expectations at play in the currency market
The ISK, Icelandic trade weighted index, appreciated by 1.7% last week and stood at roughly 123 points at the close of the markets on Friday. The 15% EUR/ISK was down by 1.9% and the USD/ISK was down by 0.8% and stood at 68.6 points on Friday. Aluminium expectations seem to be have been at play in the currency market in recent weeks. Expectations of a policy interest rate hike on 21 December could also be a factor.
Top Economic News
Country Date
Icelandic Trade weighted index
Interbank rates
Fixed rate ICE
Forward rate
Main Economic Headlines:
Economic growth at a three-year low
5,3% According to preliminary figures from Statistics Iceland, GDP grew in real terms by USD 0.8% in Q3 2006 from the same period last y 4,5% ear. This signals that economic growt EUR is at three-year low. Growth in national expenditure contracted sharply, increasing GBP a mere 2.4% YOY, compared with 8.4% during Q2 2006. Private consumption also slowed down, rising 2% in real terms from the previous year. Gross fixed investment dropped by 1.6% in real terms from the previous year, after having grown by 32% in Q1 2006 and 12% in Q2 2006. The continuing trade deficit further Focus of the week - The tide is turning
The yield curve of T-notes
The Icelandic economy has often shown itself to be highly flexible, and last week's GDP figures seem to underline that. According to Statistics Iceland GDP growth in 10% Q3 slumped to a three-year low, with a significant drop in the growth rate of private consumption and a contraction in investments YOY. In Kaupthing Research's opinion economic growth in 2006 will only amount to around 3%, compared to our previous forecast of 4.7%. As Kaupthing Research has forecast, economic growth has already peaked in the current economic cycle but the adjustment seems to be happening slightly faster than expected. At the same time inflation pressure appears to be slowing down dramatically, which eases the pressure on the Central Tight monetary stance
Kaupthing Research believes that the current monetary stance is sufficient to bring 2% inflation down to target next year. In this respect Kaupthing Research and the Central Bank seem to differ in opinion. In the latest Monetary Bulletin the Central Bank stressed that further tightening might be needed since according to the Central Bank's forecast the current level of interest rates was not sufficient to rein in inflation to below the target before the end of 2008. The question now is whether or not recent figures alter the picture for this week's interest rate meeting. A record Volatility of the indexed yield
Interest rate differential
high current account deficit and unemployment figures of 1.1% combined with a rather expansionary government budget for 2007 point towards increased imbalance in the economy. At the same time growth and CPI figures indicate the opposite. Taking all this into consideration, Kaupthing Research forecasts that the Central Bank will hike its policy rate on Thursday by 25 to 50 bp.
Useful links
after 1 year
2005 avg.
Central Bank of Iceland National Debt Management Agency www.ndma.isBloomberg: KAUP <GO> Reuters: KAUP Kaupthing Research
Research Disclaimer:
Turnover in the bond market
The opinions and projections included in this report are based on general information which Kaupthing Bank hf. has gathered when this report is written. Information in this report Fixed Income Sales
is only published for informative purposes and should thus not be viewed as an offer of any Opinions and projections can change without notice. Although particular care is taken that the information is correct and precise when it is put forward, Kaupthing Bank hf. or its employees cannot be held responsible for faults. Please contact Kaupthing Bank’s trade FX and Derivatives
floor before signing a deal based on this report. Kaupthing Bank hf. and its employees are not responsible if the price of shares, in which the company recommends a buy, might go Kaupthing Bank hf., its employees, board members, or others in any manner related to Kaupthing Bank hf., might hold interests in specific companies which the Kaupthing Bank analyses discuss at each time. These interests might be as shareholders or consultants in specific companies, arrangers of offerings, market makers for issuers, or may refer to interests connected to other investment banking services provided. 18.12.2006


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