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Aug 20 - 26 , 2001

BoJ downgrades assessment of economy

The Bank of Japan downgraded its assessment of the economy on Wednesday for the third consecutive month, a day after it surprised financial markets by voting to pump more cash into the financial system.

Citing dismal economic activity at home and abroad, the central bank's report prompted its announcement Tuesday to ease its already ultra-loose monetary policy. Adjustments in economic activities are intensifying further, reflecting a substantial decline in exports and production, the report said. Industrial production had continued to decline sharply, reflecting falls in demand and large stockpiles of electronic parts and materials, the central bank said.

The Bank of Japan highlighted a weakening of household income, in sharp contrast to July when the central bank said income had "not yet deteriorated." Looking ahead, it said household incomes "are likely to weaken gradually along with a decline in corporate profits." Moreover, the substantial decline in production will cause domestic demand to decrease and in turn generate the risk of adjustments in economic activities spreading even further, it said.

The central bank also expressed concern about a near-term revival in the US economy but remained hopeful of an upturn by the end of the year. There still exist such general views that around the end of this year, ongoing inventory adjustments in IT-related goods worldwide are likely to peak out and overseas economies, particulary the US, will start to recover. Bank of Japan governor Masaru Hayami said Tuesday a steep fall in Japanese share prices was a trigger for the monetary easing, a concern that was mirrored in the report.

Stock prices are declining around the lowest level since the start of the year, it said. JP Morgan senior economist James Malcom agreed: The fact that share prices hit a new 16-year low on Monday would have had some impact (on the decision). On Tuesday the BoJ decided to increase the level of current account reserves at the bank by one trillion yen to six trillion yen and raise the outright purchase of long-term government bonds to 600 billion yen a month from 400 billion yen.

IMF warns US outlook uncertain

Global expectations of a US economic recovery in the second half of this year are now shrouded in uncertainty, IMF directors said in a report on Tuesday.

If US productivity fell far short of expectations, the US economy risked descending into an extended slowdown, taking the rest of the world with it, the International Monetary Fund said.

Over the longer term, the United States faced a serious threat from its bulging current account deficit, which was unsustainable and threatened to send the dollar into a sharp fall, it added. "Directors agreed that at the present juncture, the uncertainty surrounding the economic outlook was higher than usual," the IMF executive board said in an annual review.

The IMF bosses expressed concern that any prolonged US weakness was likely to be felt elsewhere, especially in economies that depended on the United States for exports. The US economy, which led a global slowdown late last year and was now feeling the secondary effects, could pick up in the second half or remain sluggish for an extended period, the Fund said.

Which way the economy turned depended largely on consumer and business spending and the United States' ability to sustain the rapid productivity growth of the second half of the 1990s, the IMF said. US productivity jumped 2.5 per cent in the second quarter, according to latest data. But the average rate of productivity growth from 1996 to 2000 was revised down to 2.5 per cent from 2.9 per cent.

Higher US productivity also attracted foreign investment, however, aggravating the US current account, which was in a deficit of $109.6 billion in the first quarter of this year. "Directors indicated that the size of the US current account deficit did not appear sustainable in the longer term and it raised concerns that the dollar might be at risk for a sharp depreciation, particularly if productivity proved disappointing," the IMF report said.

US oil industry pushes for easing of gasoline rules

The US oil industry has asked the Environmental Protection Agency (EPA) to back the elimination of oxygen-content rules in clean-air gasoline as a way to lower pump prices, the American Petroleum Institute (API) said on Monday.

The oil industry says the nation's refiners can produce clean gasoline more cheaply without adding oxygenates, like MTBE or ethanol, helping them to prevent price spikes and shortages like the one that hit the Midwest last summer.

The EPA — which in June denied California's request to be freed from oxygenate rules — is examining ways to limit the number of different fuel blends required at US pumps as part of the Bush administration's plan to revamp energy policy. Lifting the oxygenate requirement would make the boutique fuel problem much easier to solve, said Ed Murphy, director of the API. If the EPA is serious about making the nation's supplies more flexible, while still keeping clean-air benefits, they should recommend eliminating the mandate.

Yen drops

The yen was sold sharply lower and Tokyo share prices jumped on Tuesday after the Bank of Japan announced a surprise decision to further ease its monetary policy to boost the flagging economy, dealers said.

It was a surprise to almost all players, Daiwa Bank dealer Nobuaki Kawashima said. Both the dollar and the euro shot up against the yen immediately after the announcement. On the Tokyo Stock Exchange, the key Nikkei index surged 440.39 points or 3.8 per cent, to end at 11,917.95 as investors welcomed the central bank's decision, brokers said.

Dollar remains weak

The dollar held steady at five-month lows early Thursday, posting just the slightest of gains against the euro and yen as worries about the health of the U.S. economy failed to let up.

Currency traders showed little reaction to the morning's economic indicators, which showed a stable housing market, little inflation and fewer people lining up for unemployment benefits.

The euro traded at 91.41 cents, little changed from 91.43 cents Wednesday. The dollar rose to 119.72 yen from 119.66 yen. For the dollar, those are near the weakest levels since March.

BoE voted 6-3 to cut rate

The Bank of England Monetary Policy Committee voted 6-3 to cut UK interest rates a quarter per centage point in August as the economy slowed.

The rate cut earlier this month was the fourth in 2001 and took the markets by surprise. Policy makers had considered a deeper 0.5 per cent cut in rates, according to the minutes of the August 2 meeting released.

Deputy Bank of England governors Mervyn King and David Clementi were opposed to the move and argued the rate should have been left at 5.25 per cent.

World gold demand falls by 3.4pc

World gold demand fell by 3.4 per cent in the second quarter of this year to 764.2 tons because of the worsening economic environment, the World Gold Council said on Monday. The fall marked a reversal from the first quarter, when demand for the precious metal had picked up by 5.7pc from the same period a year earlier.

This meant that demand growth in the first half of this year grew by one per cent from the previous year to 1,601.4 tons, the council said in its gold demand trends quarterly report. Sharp falls in demand occurred as a result of localized economic problems in Turkey, Taiwan, Pakistan and Japan, where consumption dropped respectively by 72 per cent, 47 per cent, 19 per cent and 18 per cent.

China-US missile talks next week

US experts will have talks in Beijing next week on what Washington calls violations of a Chinese pledge not to proliferate ballistic missiles, US State Department spokesman Philip Reeker said on Monday.

The US inter-agency delegation, led by Deputy Assistant Secretary of State Vann Van Diepen, will meet their Chinese counterparts on Aug 23 and possibly Aug 24, he said.

Nikkei wipes out week's gains

Tokyo stocks slackened in early trade on Friday as high-tech issues extended losses despite new stability in the yen, pulling the Nikkei average to 16-year lows and erasing gains from a credit easing three days ago.

Continued falls in Japan's high-tech bellwether Sony Corp and camera and printing maker Canon Inc helped send the tech-sensitive Nikkei down 40.25 points or 0.35 per cent at 11,474.77.

Earlier, the Nikkei had fallen as low as 11,412.36, below the previous 16-year intraday low of 11,417.70 marked on Monday.

The broader TOPIX index was down 5.64 points or 0.48 per cent at 1,169.43.

In Australia, the All Ordinaries index was barely changed after an hour's trading, the index slipping just 0.4 points to 3273.1.

In Korea, the Kospi opened firmer, trading 4.15 points higher at 585.10 while in Taipei the Taiwan Index weakened 1.94 points to 4685.39 in early activity.

Philips to shed factories

Philips, Europe's biggest consumer electronics company, plans to shed factories that make mature products such as standard television sets.

Chief Executive Gerard Kleisterlee said in an interview with the Financial Times that the Dutch company was in talks with potential partners that might take over those manufacturing sites.

The move is intended to improve profitability at Philips, which posted a second-quarter loss of 770 million ($656 million) on July 17, and could lead to the transfer of tens of thousands of staff, the FT said.

Results

Dell: Dell Computer, the world's top supplier of personal computers earned $433 million, or 16 cents per share, compared with $603 million, or 22 cents per share, for the same quarter a year ago.

HP: Hewlett-Packard reported net earnings of $111 million, or 6 cents per share, for the quarter ended July 31. That's down 88 per cent from the profit of $1.1 billion, or 51 cents per share, it reported in the same quarter a year ago.

Hormel: Hormel Foods Corp. reported net earnings of $33.2 million, or 24 cents a diluted share, for the quarter ended July 28, compared with $29.1 million, or 21 cents, a year ago.

Tiffany: Luxury jeweler Tiffany & Co. said net income in the quarter ended July 31 fell to $36.1 million or 24 cents a diluted share, from $39.2 million, or 26 cents a share, in the year-ago quarter.

China Mobile: Strong subscriber growth boosted China Mobile's first half profit by 58.3 per cent, to $1.67 billion.

ABN Amro: Rising costs and weak financial markets clipped ABN Amro's second-quarter profit, which fell 21 per cent. After-tax profit, excluding one-time items, declined to 671 million ($615 million), or 0.44 a share, from 851 million, or 0.57 a share, a year earlier.

Avnet: Avnet Inc. posted a fiscal fourth-quarter net loss Wednesday due to a $236.7 million charge related to its acquisition of Kent Electronics.

UBS: UBS, Switzerland's biggest bank, said net income in the three months to June 30 fell to 1.39 billion Swiss francs ($822 million), or 1.33 francs a share, excluding one-time items, from 2.05 billion francs, or 1.84 francs a share, a year earlier.

U.S. bonds on the rise

U.S. Treasurys jumped higher on Thursday after a slide in U.S. shares, a weak regional manufacturing survey, and the biggest drop in consumer price inflation in 15 years all boosted hopes for another Federal Reserve rate cut beyond next week's expected ease in rates.

Two-year notes rose 4/32 to 100-9/32, yielding 3.72 per cent. Five-year notes rose 7/32 to 100-14/32, yielding 4.52 per cent.

Benchmark 10-year notes rose 15/32 to 100-15/32, yielding 4.94 per cent, while 30-year bonds climbed 16/32 to 98-14/32, yielding 5.48 per cent.

Mortgage rates slip

Mortgage rates in the latest week slipped from the previous week, with only the one-year adjustable-rate mortgages inching higher.

The benchmark 30-year fixed-rate mortgage was at 6.92 per cent for the week ending Aug. 17. The average this week for the 15-year fixed-rate mortgage was 6.48 per cent. One-year adjustable-rate mortgages (ARMs) averaged 5.71 per cent.

Jobless claims move lower

The number of new jobless claims in the United States came in weaker than expected last week, suggesting growing improvement in the U.S. job market.

New claims for state unemployment benefits fell to 380,000 in the week ended Aug. 11 from a revised 388,000 the prior week, the Labor Department reported. Analysts surveyed by Briefing.com had forecast new claims of 395,000.

Europe loses impetus

Signs of a rally in European shares disappeared by the close of business Wednesday, with all key indices ending lower in nervous trading.

Frankfurt's Xetra Dax was down 1.5 per cent at 5,437.54 late in the session, while London's FTSE 100 dropped 0.8 per cent to 5,461.6. The blue chip CAC 40 index in Paris closed down 0.6 per cent at 4,933.97.

In Amsterdam, the AEX index slipped 1 per cent and the SMI in Zurich fell 0.7 per cent. Elsewhere in the region, markets in Italy and Spain were closed for the Assumption Day holiday.

The pan-European FTSE Eurotop 300, a broader index of the region's largest stocks, ended down 0.9 per cent, with the telecom and information technology sub-indices among the biggest sector losers.

Mergers & Acquisitions

Buffett—Honeywell: Honeywell International Inc. got a boost Tuesday when it was revealed that billionaire investor Warren Buffett bought a stake in the embattled manufacturer.

Buffett acquired 2.25 million shares in Honeywell that are worth $78.5 million, according to a form 13F filing with the Securities and Exchange Commission.

Devon—Mitchell: Devon Energy Corp., a natural gas producer, has agreed to acquire rival Mitchell Energy & Development Corp. for $3.1 billion in cash and stock, the companies said Tuesday.

Gates—Gabelli: Microsoft Corp. Chairman Bill Gates is investing $100 million in fund management firm Gabelli Asset Management Inc., Gabelli said Monday.

U.S. Steel closing plant

U.S. Steel Group is closing most operations at its Fairless plant outside Philadelphia, blaming steel imports for the move.

The company, the nation's largest steelmaker, said it will take a pre-tax charge of between $35 million and $45 million to cover the closure, and that it will layoff about 700 employees as a result of the move.

US Steel and other major U.S. steelmakers have been charging that non-U.S. steelmakers are illegally dumping steel here, and earlier this summer President Bush asked the U.S. International Trade Commission to investigate whether restrictions on steel imports are warranted.

Indonesia will seek to mend ties with IMF visit

Indonesia is seeking to repair its relations with the International Monetary Fund (IMF) when the group visits next week.

A high-level mission led by Anoop Singh, deputy director for the Asia-Pacific region, will arrive Monday, the IMF's Indonesia office told.

The IMF suspended a $400 million loan last December, saying the government had not met its economic reform targets. That's part of a vital $5 billion package.