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ECB's Weber Says Interest Rates May Need to Become Restrictive

By Gabi Thesing

Oct. 11 (Bloomberg) -- European Central Bank governing council member Axel Weber said the bank may need to raise interest rates to a level that restricts economic growth to keep inflation under control.

``If risks to price stability are threatening to materialize, monetary policy can't lose sight of its primary mandate -- even if that means no longer supporting the robust economy or becoming restrictive,'' Weber, who also heads Germany's Bundesbank, said in the text of a speech in Munich today. There may be an ``additional need'' to raise interest rates, given the ``expected acceleration in euro-region inflation over the coming months.''

The ECB stepped back from plans to raise rates in September, saying it wanted to assess the economic impact of rising credit costs and financial-market turbulence caused by the U.S. housing slump. Signs of discord are starting to emerge among ECB policy makers on the best way forward for monetary policy, with Weber the strongest advocate for another rate increase.

Council members Vitor Constancio of Portugal and Klaus Liebscher from Austria have noted that the euro's appreciation is helping contain prices on imported goods such as oil, while Ireland's John Hurley and Finland's Erkki Liikanen have stressed the need to gather more information before deciding what to do with interest rates.

`Broad Front'

While Weber acknowledged ``increased uncertainty,'' he said the ECB needs to remain focused on fighting inflation. ``Price increases are taking place on a broad front and are no longer limited to energy and volatile food prices,'' he said.

Inflation accelerated beyond the ECB's 2 percent limit for the first time in over a year in September. The bank expects the rate to remain ``significantly'' above 2 percent into next year.

The ECB left its key interest rate at 4 percent last week and dropped a phrase used in previous months that its monetary policy ``is still on the accommodative side,'' suggesting the bank no longer considers interest rates are boosting economic growth.

Weber said the economic outlook ``continues to be favorable overall for the euro region'' and the ECB's main scenario for ongoing expansion ``remains valid.''

In September the ECB forecast economic growth of about 2.5 percent this year and 2.3 percent next year after 2.8 percent in 2006, which was the fastest expansion since 2000.

To contact the reporters on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net .
Last Updated: October 11, 2007 14:31 EDT

U.S. Stocks Fall, Led by Technology Shares; Google Retreats

By Eric Martin

Oct. 11 (Bloomberg) -- U.S. stocks fell after a JPMorgan report on Chinese search engine Baidu.com Inc. triggered a sell- off in technology companies on concern that prices for computer- related shares have outpaced their profit outlook.

Google Inc., the most-popular Internet search site, fell for the first time in five days, while Apple Inc., maker of the iPhone, dropped the most in a month. Department stores Nordstrom Inc. and J.C. Penney Co. led retailers to their steepest fall since Sept. 25 after last month's sales trailed analysts' estimates.

The S&P 500, which rose as much as 0.9 percent to a record earlier in the day, lost 8.06, or 0.5 percent, to 1,554.41. The Dow Jones Industrial Average, which also hit an intraday record, dropped 63.57, or 0.5 percent, to 14,015.12. The Nasdaq Composite Index decreased 39.41, or 1.4 percent, to 2,772.2.

JPMorgan reduced its third-quarter sales estimate for Beijing-based Baidu.com, spurring concern that this year's 18 percent advance in computer-related stocks may not be warranted by their profit outlook. The declines erased an earlier rally sparked by Wal-Mart Stores Inc.'s increased earnings forecast.

``It was all triggered with that JPMorgan call,'' said Clarence Woods Jr., chief equity trader with Baltimore-based MTB Investment Advisors, which manages $12 billion. ``You've had such a straight up run here in the last two weeks in the tech area. Everyone was waiting for someone to blink and when they did people decided to sell and take their profits.''

European Central Bank governing council member Axel Weber's remarks that the bank may need to raise interest rates to keep inflation under control also contributed to declines.

Baidu.com, Google

American depositary receipts of Baidu.com, owner of China's most popular Internet search engine, fell $34.39, or 10 percent, to $308.78. JPMorgan analyst Dick Wei said a plan to shut down some Internet data centers will hurt sales and slow its growth rate this year. Baidu, whose shares have rallied 174 percent this year, expanded its share of the Chinese market in the second quarter and accounted for more than twice as many queries as closest rival Google.

Google, which climbed above $600 for the first time this week, retreated $3.39 to $622. Apple lost $4.56 to $162.23, trimming its advance for the year to 91 percent.

The S&P 500 Information Technology Index, which has climbed 18 percent since the beginning of the year, fell 1.3 percent and contributed 41 percent to the decline in the overall index.

``In most cases, when you start getting downgrades in a certain sector, they have a tendency to paint the sector with a broad brush,'' said Andrew Seibert, who helps manage $950 million at Stewart Capital Management in Pittsburgh. ``Anyone who is associated with that kind of technology is going to get hit along with those companies themselves. That happens in almost any industry.''

Retailers Slump

J.C. Penney dropped $4.73, or 7 percent, to $63.27. Nordstrom fell $3.64 to $44.97, leading the S&P 500 Retailing Index to a 1.3 percent tumble. The retailers, which together represent 15 percent of annual department-store revenue, also reduced their profit forecasts.

At least 13 retailers have lowered earnings projections as consumers spend less amid higher food and fuel costs and the worst housing slump in 16 years, signaling what may be the worst holiday shopping season in five years.

Qualcomm Inc. dropped 83 cents to $41.47. Nokia Oyj, the largest mobile-phone maker, is seeking to persuade a U.S. trade judge that its mobile phones don't use some of Qualcomm's patents. An initial decision is due next month. A loss could force Qualcomm to cut its fees at a time when its chip designs are gaining wider use.

SanDisk, Fastenal

SanDisk Corp. fell $2.98, or 5.8 percent, to $48.70 after Oppenheimer & Co. downgraded the world's largest maker of cards that store pictures in digital cameras to ''neutral'' from ''buy.'' Many of the advantages that the company has had are ``starting to unwind,'' analyst Vijay Rakesh wrote in a note.

Fastenal Co. plunged $5.04, or 10 percent, to $44.25, the steepest drop in the Nasdaq-100, after the largest U.S. retailer of nuts, bolts and other fasteners posted third-quarter profit below analysts' estimates.

A gauge of stock-market volatility climbed the most since August. The Chicago Board Options Exchange Volatility Index increased 13 percent to 18.88, its higher since Sept. 24. Higher readings in the so-called VIX, derived from prices paid for S&P 500 options, indicate traders expect bigger share-price swings in the next 30 days.

About two stocks declined for every one that rose on the New York Stock Exchange. Some 1.5 billion shares changed hands on the Big Board, 8 percent less than the three-month daily average.

Wal-Mart Forecast

Stocks rallied for most of the day after Wal-Mart, the world's largest retailer, raised its profit forecast as reduced costs allowed it to be more profitable. The company expects third-quarter earnings from continuing operations of as much as 69 cents a share, more than the previous forecast of as much as 65 cents. Wal-Mart gained $1.31, or 2.9 percent, to $46.90.

Early gains were also spurred by a government trade report that suggested economic growth is accelerating. The trade deficit shrank 2.4 percent to $57.6 billion, the Commerce Department said, as exports rose to a record for a sixth straight month. The surge in exports may also be helping the job market in the face of the housing slump: unemployment-benefit claims last week dropped more than predicted, the Labor Department said.

GM, Ford

General Motors Corp., the biggest U.S. automaker, climbed above $40 for the first time since 2005 and Ford Motor Co. also rose on prospects for improved earnings. Ford may be able to reach a U.S. labor contract without a costly strike after the United Auto Workers granted Chrysler LLC retiree health-care relief and didn't require extensive job guarantees.

GM added $1.86, or 4.9 percent, to $39.99 for the steepest gain in the Dow and Ford jumped 53 cents, or 6.4 percent, to $8.76 for the biggest gain in the S&P 500.

The Russell 2000 Index, a benchmark for companies with a median market value of $687 million, dropped 1.2 percent to 834.98. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 0.6 percent to 15,706.85. Based on its decline, the value of stocks decreased by $114 billion.

In other markets, the yield on the 10-year Treasury note fell 1 basis point, or 0.01 percentage point, to 4.63 percent. The dollar dropped for a third day against the euro. Crude oil rose $1.78, or 2.2 percent, to $83.08 a barrel in New York after a government report showed an unexpected decline in inventories.

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net .
Last Updated: October 11, 2007 17:30 EDT