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To: maceng2 who wrote (201792)	11/3/2002 10:37:18 AM
From: maceng2	Respond to of 436258

Fed expected to cut rates this week news.ft.com By Kevin Morrison in London Published: November 3 2002 13:45 \| Last Updated: November 3 2002 13:45 This week is expected to see the resumption of interest rate cuts by the US Federal Reserve following an 11 month pause as signs of weakening US economy and the looming threat of war in Iraq are seen prompting the Fed's move. However cuts by centrals banks in Europe and the UK are more problematic with a Mexican stand-off between European politicians and the European Central Bank likely to result in a no change at Thursday's ECB meeting. The Bank of England is also likely to keep rates on hold at 4 per cent this week. Nevertheless fixed interest investors are factoring in rate cuts by the end of the year for both the ECB and BoE. Following a string of poor US economic data in the past 10 days - rising unemployment, falling manufacturing activity, slower than expected GDP growth and consumer confidence at nine year lows - fixed interest investors have moved from a one-in-three chance of a rate cut to near certainty of an easing. The worsening US economic outlook could further test the dollar which hit parity with the Euro on Friday, for the first time since late July. The dollar has also slipped to a one-month low against the Yen, losing more than Y2 last week to just under Y122. Guillane Salomon, fixed income strategist at UBS Warburg, said the market is expecting a 25 basis point cut in the federal funds rate to 1.50 per cent when the Federal Markets Open Committee meets on Wednesday. HSBC is more aggressive, forecasting a 50 basis point cut. "Bond prices have risen sharply in the past week as the market is now factoring in a 95 per cent probability of a cut, compared to a 30 per cent probability a little more than a week ago," Mr Salomon said. An easing by the Federal Reserve will also underline a deterioration of confidence in the global economy. In late spring the market was looking at a US rate tightening following signs of an improving economic conditions in the first quarter. It will also signal that the Federal Reserve's aggressive rate cuts late last year - when the bank cut four times or by 125 basis points in reaction to the September 11 attacks - have not had the stimulatory effect that the US had initially hoped. Mark Cliffe, chief economist at ING Financial Markets, said the Federal Reserve's widely expected easing may be partly influenced by politics with the United Nations expected to vote on the resolution to allow weapons inspectors in Iraq. A UN vote is expected this week, but not until after tomorrow's mid-term congressional elections in the US. "I think the focus is going to be back on Iraq once the elections are out of the way and the clock starts ticking for the weapon inspectors," Mr Cliffe said. Mr Cliffe said has forecast the Federal Reserve to cut the funds rate by as much as 125 basis points to 0.50 per cent by the end of 2003 first quarter, if the US attacks Iraq. However part of the war premium has gone out of the oil price, which hit an 11-week low last week of about $26.50, versus the $30 price it traded in September. Although this week is likely to show further weakness in Eurozone economies with the dominant services sector seen revealing its second consecutive monthly contraction for October and follows last week's data showing a Eurozone manufacturing contracting for the second month in a row. September was the first time the services sector contracted this year. Mr Salomon at UBS Warburg, said German bond futures prices - widely seen as a indicator for ECB rate movements - rallied about 20 basis points last week with investors now overwhelming pricing in a cut to 3 per cent by the end of the year from the current rate of 3.25 per cent. Whereas a rally in UK gilts have been less pronounced recently, but still investors are looking at a cut to 3.75 per cent from the existing 4 per cent by the end of 2002. In Japan, there is a market holiday today, but investors will be looking for further reaction to last week's banking reform package. Cisco, the Internet networking equipment supplier, is the highlight of the US corporate results this week, when it reports its first quarter results after the market close on Wednesday. However with most of the US quarterly earnings season complete, the focus turns to Europe. In the financial sector ABN Amro, BNP Paribas, Deutsche Boerse, Euronext and London Stock Exchange all report. British Airways, Marks and Spencer, BT Group and BSkyB are the highlight of UK corporate earnings this week.