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Aug 28 - Sep 02 , 2001

Fed saw slowing in June

Federal Reserve policy makers saw a slowdown in several key components of the U.S. economy in the second quarter, leading them to cut interest rates in June, according to minutes of the Fed's June meeting, released Thursday.

The Fed cut a quarter per centage point from its target for the federal funds rate, an overnight bank lending rate, on June 27 after a two-day policy meeting, its sixth cut of the year in an effort to fend off a recession.

In the minutes, the Fed said it focused on falling employment and industrial output, slowing consumer-spending growth and business spending before voting 9-1 to cut rates again.

"The information reviewed at this meeting suggested that economic activity continued to grow little, if at all, in the second quarter," the minutes said.

Fed policy makers also worried that corporate profits still were at risk, which could lead to falling stock prices and more job cuts, both of which could erode consumer and business spending. Consumer spending is important to the Fed because it fuels two-thirds of the U.S. economy.

The Fed, which is charged with keeping inflation at bay, also noticed that energy prices had flattened, though at a high level, and core price inflation — inflation minus volatile food and energy prices — had fallen. Fed Chairman Alan Greenspan hasn't been concerned about inflation for some time, meaning he felt the Fed was free to cut rates again if necessary.

While William Poole, president of the Federal Reserve Bank of St. Louis, was the only policy maker to formally oppose the rate cut, others shared his concern that the Fed was close to pumping too much money into the economy.

The Fed cut an additional quarter point after its Aug. 21 meeting, but the minutes of that meeting will not be available until after the Fed's Oct. 2 meeting.

German economy stalls

Confirmation that German economic growth has stalled could give euro-zone monetary chiefs the excuse to cut interest rates next week.

Growth in Europe's biggest economy ground to a halt in the second quarter, official figures from Germany's Federal Statistics Office showed on Thursday, as most economists had predicted.

The numbers reflect output and investment cutbacks by companies suffering from excess stock amid a global economic slowdown. The construction industry came under pressure as building work on factories and offices dwindled.

German Finance Minister Hans Eichel refused to be downcast, however, telling ZDF television there was "no reason for pessimism." Referring to tax cuts that came into force in January, Eichel forecast an upturn in demand later in 2001.

"We see that the inflation rate is going down, so that there is a chance that tax reform with its enormous relief in the second half of the year will begin to work," Eichel said.

But that isn't likely to deliver a revival in the economy until the end of the year, economists warned.

"The (second-quarter) numbers are nothing to shout about, and they could have been worse," Ken Wattret, an economist at BNP Paribas, told.

But he warned: "We can expect the third quarter to be subdued and possibly a better fourth quarter."

The European Central Bank holds its next interest rate-setting meeting on meeting to set on August 30. The majority of economists now expect it to cut rates on that day.

"This will encourage the ECB to lower rates sooner rather than later," said Wattret. "Their own growth target (for the euro zone) is 2 1/4 to 2 1/2 per cent. They won't achieve that now."

The ECB has stubbornly decided not to cut rates since May despite calls from economists and politicians concerned about the effects of U.S.-led economic slowdown on the 12-nation euro zone.

S. Korea pays back last instalment of IMF loan

South Korea's central bank chief on Thursday signed the final cheque for the International Monetary Fund (IMF) to end the country's financial crisis nightmare. Taking a break from battling new worries over the economy , Finance and Economy Minister Jin Nyum said clearing the IMF rescue package was a "historic" event.

Bank of Korea governor Chon Chol-Hwan signed a $111.18 million transfer and sent a message to the IMF saying South Korea "has now repaid in full" the emergency loan extended three years ago. South Korea was forced to seek a $58 billion rescue package from the IMF in December 1997 after feeling the full blast of the Asian financial crisis, which exposed serious structural problems in the economy.

IMF, Indonesia likely to finalize preliminary deal

An International Monetary Fund (IMF) team began talks Monday on restarting a crucial stalled loan programme to Indonesia, with both sides expressing optimism about the outcome. State Enterprises Minister Laksamana Sukardi said the two sides hope to finalise by Thursday a Letter of Intent (LoI) spelling out Jakarta's commitments for fiscal reforms in return for loans.

They (IMF) are very optimistic. The mood was positive, said Sukardi after 30 minutes of preliminary talks at the finance ministry. It (the LoI) is hoped to be finished by Thursday, Sukardi told reporters. They will send the new LoI immediately to Washington. Hopefully it will be approved.

Figures point to drift for Japan

Fresh figures hint at how bad the second quarter downturn hit Japan, the world's second-biggest economy.

Japanese economic activity to June fell 1.9 per cent over the previous quarter, as measured by the Ministry of Economy, Trade and Industry's "all-industries" index.

It was the first quarterly decline since late 1998. That's a 7.3 per cent annualized decline, which J.P. Morgan economist Ryo Hino noted was very sharp.

Though actually slightly firmer than analysts expected, Wednesday's figures give an early indication of how bad the second quarter was in Japan.

'Dire' GDP due Japan reports its second-quarter gross domestic product figures on September 7. Those numbers are expected to be dire.

The country escaped a recession on a technicality last week, when a regular revision moved its first-quarter GDP to a 0.1 per cent rise from a decline.

Argentina gets IMF aid

State workers in populous Buenos Aires province are being paid partly in government bonds — another sign of an economic crisis that prompted international lenders to loan Argentina another $8 billion.

The International Monetary Fund announced plans late Tuesday to provide more aid, raising to $22 billion the total amount of emergency loans to help stabilize South America's second-largest economy. President Fernando De la Rua said the IMF decision "allows us to stop living under the negative and end the anxiety."

On the same day, cash-strapped Buenos Aires province began handing out government bonds to help meet the payroll for thousands of state workers.

Japanese business sentiment

Business sentiment of Japanese firms operating in five Southeast Asian countries has declined overall compared to a year earlier, a survey published on Monday showed. Apart from Indonesia, business sentiment among Japanese firms in Malaysia, Philippines, Thailand and Singapore had declined compared to a year earlier, the survey of 1,622 firms by Japan External Organization said. Of the 1,622 firms surveyed 1,132, or 69.8 per cent, of them responded.

Mergers & Acquisitions

HW—Vodafone: Hutchison Whampoa has denied reports it is seeking to sell its stake in Vodafone, the world's biggest mobile-phone company.

Lilly—Isis: Shares of Isis Pharmaceuticals Inc. soared Wednesday after the company announced a significant investment from major drugmaker Eli Lilly & Co. as part of an agreement to license one of Isis' experimental cancer compounds. Under the agreement, Lilly will make a $75 million equity investment in Isis through the purchase of stock at $18 per share, well above current market prices. That investment will give Lilly about a 9 per cent stake in Isis.

Roadway—Arnold: Trucking company Roadway Corp. agreed Wednesday to buy Arnold Industries Inc. for $475 million cash, putting Roadway into the short-haul trucking market.

Alcoa—BHP: Rivals Alcoa Inc. and BHP Billiton agreed Monday to combine their metals distribution units, creating a combined firm with over $2 billion in revenue.

Slippery day on Wall St.

U.S. stocks floundered Thursday, moving lower after the minutes from the Federal Reserve's June meeting were released, reminding investors that the Fed still sees a stagnant economy.

The Nasdaq composite index shed 17.04 to 1,842.97, while the Dow Jones industrial average flip-flopped before heading lower, falling 47.75 to 10,229.15. The Standard & Poor's 500 dipped 3.22 to 1,162.09.

U.S. bonds hold gains

U.S. Treasurys rose Thursday after a government report showed a rise in weekly jobless claims, underpinning ongoing concerns about extended sluggish growth and cementing hopes for lower interest rates.

Two-year notes were up 1/32 at 100-10/32, yielding 3.70 per cent, while five-year notes were 3/32 higher at 100-24/32 to yield 4.45 per cent. Benchmark 10-year notes were up 3/32 at 100-30/32, yielding 4.88 per cent, and 30-year bonds were up 11/32 at 99-15/32 to yield 5.41 per cent.

Major bank estimates cut

Analysts on Thursday cut their earnings estimates for five Wall Street heavyweights, including Morgan Stanley and Goldman Sachs Group Inc., citing continued weakness in key operations including merger advisory and stock and bond underwriting.

Mortgage rates retreat

Mortgage rates edged lower after this week's seventh interest-rate cut of 2001 by the Federal Reserve.

The benchmark 30-year fixed-rate mortgage was at 6.91 per cent for the week ending Aug. 24. The average this week for the 15-year fixed-rate mortgage was 6.47 per cent. One-year adjustable-rate mortgages (ARMs) averaged 5.68 per cent.

Europe closes mixed

Europe's major bourses ended mixed Thursday as investors digested a report that growth in Germany had ground to a halt.

Frankfurt's late-trading Xetra Dax recovered slightly following earlier falls, rising 0.6 per cent to 5,252.23, while London's FTSE 100 closed 0.2 per cent lower at 5,396.5. The CAC 40 index in Paris ended slightly down at 4,809.5.

In Amsterdam, the AEX index climbed 1.3 per cent, while the SMI in Zurich lost 0.6 per cent. Milan's MIB30 index rose 0.2 per cent.

U.S. surplus shrinks

U.S. budget figures released by the Bush administration Wednesday show a 43 per cent drop in the latest projected surplus, creating what could be the narrowest of cushions if the government is to avoid tapping the politically sensitive Social Security trust fund to balance the budget this year.

The longer-term projections continue to show substantial surpluses, with only minimal effects from the current economic slowdown and income-tax refunds that have cut sharply into the surplus for the current fiscal year, which ends in September.

Concorde to get OK to fly

Britain and France said Monday that Concorde supersonic passenger jets likely will clear a final hurdle this month toward resuming flights after a crash killed 113 people and left all the planes grounded a year ago.

British and French aviation authorities said they will issue airworthiness directives to Concorde operators British Airways (BAY) and Air France (PAF), clearing them to make safety modifications to their fleet.