Economy - Tuesday

Subprime mess seen spreading

Bill Gross, chief investment officer at Pacific Investment Management Co., or PIMCO, said the subprime mortgage crisis will hurt the economy and force the Fed to cut interest rates by year-end. "The subprime crisis is not an isolated event and it won't be contained by a few days of headlines in the New York Times," said Gross, who manages the world's biggest bond fund. He said subprime woes will reduce consumption and new-home building over the next 12 to 18 months.

Japan FM cites currency risks

Finance Minister Koji Omi said "it is important for the markets to be aware of the risks of acting one way," an apparent reference to carry trades in which traders borrow a low-yielding currency and buy higher-return assets. The yen rose vs. the dollar and euro on Tues. Carry trades have pushed the yen's trade-weighted value to a 22-year low.

Japan's top financial diplomat, Hiroshi Watanabe, intends to resign after an annual personnel reshuffle next month, a gov't source told Reuters. Watanabe has been seen as favoring a weak yen. IMF sees strong global growth

World economic growth will be 5% this year vs. the 4.9% rise predicted in April, said IMF chief economist Simon Johnson. Europe and developing countries are leading the way. Inflation poses the biggest risk, but rising commodity prices haven't pushed up consumer prices, he said.

Rising inflation pressures should let the Bank of Japan raise rates, which would boost the yen and gradually reduce the yen carry trade, Johnson said. An Italian think tank's business confidence index rose to 96.3 in June from 96.2 in May, but was still below April's 6-year high. Russia lets ruble rise again

The central bank boosted the ruble's value by about 0.5% vs. a basket of currencies to try to keep inflation within its 8% target for '07, traders said. The expected move followed a 0.5% increase in Feb. The revaluations come as strong economic growth ups demand for money.

COMING UP WEDNESDAY

Durable goods orders for May, 8:30 a.m. EDT (forecast: -1.0%).