Eurodollar

The world major economies at the start of 2002 were thought to be on the threshold of a monetary primed expansionary phase following a disappointing 2001; a year later the recoveries were still awaited. The U.S. Federal Reserve was the most aggressive of the key central banks during 2001-02 towards easing monetary policy while the European bank(s) tried to hold a steady course as long as possible. Japan's central bank had little flexibility since their key short-term lending rates were pushing zero. U.S. short-term rates fell to a forty-year low in 2002 and while the effect buoyed the housing industry much of the U.S. economy limped along with an economic growth a shade over 1% toward yearend. For the past few years the overriding central bank concern focused on trying to prevent the global economy from sinking into a recession; inflationary fears, normally the nemesis of central banks, were glossed over as global supply/demand imbalances were not likely to trigger any sustained upward pressure on prices; despite occasional bursts of oil (energy) related price increases. As 2002 drew to a close, a perception seemed to be taking hold that the global economy contraction had run its course and any further monetary easing was not necessary. Quite the contrary some mild monetary tightening was viewed likely, but a similar view was expressed in late 2001 for 2002. U.S. economic growth in 2002 was initially seen as reaching 3% plus and about 2 1/2% for Europe while the outlook for Japan was at best clouded. In either case, the macroeconomics role of the central bank(s) is apt to take on greater importance since some of the uncertainties affecting the global economy are new and apt to require greater collective action among the banks than seen so far. There are now almost 200 central banks, many of which are inclined to claim more independence from their national governments. The European Central Bank (ECB) representing a dozen European Union nations has been given a high degree of independence since no one government appoints all its members, and its creation four years earlier is viewed as one of the most important structural reforms in the European economy. Eventually, the ECB may represent as many as twenty European nations.

Despite the ECB's short tenure, their monetary approach does not necessarily mirror the Federal Reserve. The Fed's rates cuts were certainly not matched by the ECB and the reason is rooted in European fears of inflation, justified or not. The ECB had lowered short-term rates partially to help reverse the downward pressure on equity markets. However, Europe's sharpest economic downturn in a decade revealed during 2002 large differences among the economies of the 12 euro-zone members, and showed (1) just how far the region is from creating a truly common market while (2) creating headaches for monetary policy makers. Overall, growth in the euro-zone countries fell 0.8% in 2002 from 1.4% in 2001, but behind the numbers are widely varying national conditions. From 2001 to mid-2002, domestic demand dropped in Germany, Austria and the Netherlands. In Belgium, Finland and Spain, however, domestic demand grew. Inflationary pressures also diverged. Germany, Europe's largest economy, appears to be hurting the most since the ECB makes rate decisions based on conditions across the euro-zone, rather than those in one or two nations. At yearend 2002, the ECB bank rate was 2.75%, down from 3.25%, but it was thought that a rate at least 1% lower was needed for Germany. Euro-zone inflation, meanwhile has been holding at 2.2%, which is above its inflation target. Before the creation of the euro, Germany used to benefit from its strong D-Mark, which allowed Germany's central bank to keep interest low while neighboring European countries had to keep their interest rates relatively higher to the detriment of their economic growth. Over time, however, it's believed that common fiscal and monetary policies will evolve within the European community, but it's not likely to happen in 2003. The outlook does favor some pickup in economic growth from 0.7% in the first quarter to perhaps 2.5% in late 2003 and inflation to slow to 1.7%, which if realized should mark a return to what the ECB considers price stability, however unemployment may increase during the year to 8.8% from 8.4% in late 2002. Realization of this macroeconomic scenario to a large extent depends on what happens in Germany and to be sure--the United States.

In Asia, meanwhile, the sluggish U.S. economy in 2002 and crippled banking system in Japan threaten what could be steady economic growth throughout the region, which is thought to be capable of growing by 5.7% in 2003 vs. Japan's growth of perhaps 1/2%. The banking problems in Japan, which has ground their economy to a near halt, are not expected to abate during 2003. As in Europe the top challenge for Asia's overall growth will be whether the U.S. economy recovers as much as expected. The U.S. economy dominates the world and it's not likely to lose that position. The Fed's monetary pump priming since 2001 has so far failed to achieve the desired results. The hope is it will finally happen in 2003, which if realized may even require some moderate tightening by the Fed in mid-year. A key problems, however, is the possibility of a Mideast war and the effect it might have on consumer spending attitudes, the buoyancy of which largely prevented the U.S. from slipping into a recession in 2002, but at the Federal Reserve Chairman said during 2002 the economy had simply encountered some potholes which the easy monetary policy of 2001-02 will ultimately correct.

Futures Markets

A number of actively traded interest rate futures markets are traded worldwide. The London International Financial Futures Exchange (LIFFE) trades contracts on 3-month Sterling prices and British long Gilts. LIFFE also offers futures on Euroswiss and Italian government bonds. The all-electronic Eurex exchange in Frankfurt trades a variety of Swiss and German government bonds as well as Euribors. Canadian Bankers Acceptances and 10-year Canadian government bonds are traded on the Montreal Exchange (ME). 3-year Australian Commonwealth T-bonds are traded on the Sydney Futures Exchange. Notional bond and PIBOR futures are traded on the Paris MATIF. Euroyen futures and Japanese yen government bonds are traded in Tokyo. Libor, eurodollars, and Brady bonds are traded on Chicago's Mercantile Exchange.. A Brady bond Index futures are traded on the CBOT. For a listing of other interest rate contracts see the volume section in the front of this Yearbook.

Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here