Financial markets were initially under pressures in US morning as driven by weak non- farm productivity and small growth in unit labor costs. DJIA and S&P 500 plunged to as low as 10552 and 1112 respectively before recovering after the Fed announced to reinvest MBS proceeds. Both indices trimmed losses to 0.5-0.6% at close.

Crude oil broke below 80 in early trading as China reported decline in crude imports and USD strengthened against major currencies. However, the losses were pared after the FOMC's decision to implement more accommodative measures to stimulate growth. Moreover, crude oil price was supported by EIA's upgrade on oil demand for 2010 and 2011. The front-month contract ended the day at 80.25, down -1.5%. Today in Asia, crude oil weakened below 80 again after China reported growth in industrial production eased to +13.4% y/y, the least in 11 months, in July while inflation grew at the fastest pace in 21 months. CPI surged +3.3% in July, from +2.9% in June, as driven by a +6.8% jump in food costs amid flooding across farm areas.

At the August FOMC meeting, the Fed downgraded the US economic outlook as 'the pace of recovery in output and employment has slowed in recent month' and 'the pace of economic recovery is likely to be more modest in the near term than had been anticipated'. Views on household spending and business spending were less optimistic than at previous meetings.

Apart from leaving the Fed funds rate at 0-0.25%, policymakers, in order to support the economic recovery in a context of price stability, decided to keep constant the Fed's holdings of securities at their current level (at 2.05 trillion) by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities (2-year to 10-year bonds). The move signaled the Fed's commitment to keep interest rates low and to bolster economic recovery.

The US Energy Department (EIA) raised slightly global oil demand to 85.91 in 2010 (previous: 87.29M bpd) and 87.42 in 2011 (previous: 85.52M bpd) as driven by growth in non-OECD countries. Among the OECD countries, only the US is expected to show significant increases in oil consumption of about 0.15M bpd in both 2010 and 2011. Outlook for average oil price was also revised higher. The EIA currently expected prices to average 81/bbl in 4Q10 and 84/bbl in 2011.

After market close, the industry-sponsored API's report estimated that crude oil inventory declined -2.18 mmb in the week ended August 6. Stockpiles for gasoline dipped -1.5 mmb while that for distillated rose +2.29 mmb. The report by the US Energy Demand will probably show draw in crude oil inventory but rises in both gasoline and distillate stocks.

In tandem with others in the commodity complex, gold price initially slipped to as low as 1192.5 before rebounding after the FOMC meeting. The benchmark contract ended the day at 1198, down -0.38%. Price regains the 1200 level in Asian session today as investors speculates the Fed's commitment to low rates will result in more accommodative measures in the future. Meanwhile, inflation in China exceeded the government upper threshold of +3% in July. Worries over higher price levels usually drive inflows to gold which is treated as an inflation hedge.

Weekly change in inventory as of 06/08/10 ChangeMarket Expectation Previous
Crude oil  -2.40 mmb-2.78 mmb
Gasoline  +0.25 mmb+0.73 mmb
Distillate  +1.75 mmb+2.17 mmb

Comparison between API and EIA reports:

API (Aug 6)

EIA (Aug 6)

Forecast (using API's inventory level)Inventory
Crude oil-2.18 mmb352.7 mmb-0.78 mmb


353 mmb
Gasoline-1.50 mmb223.5 mmb+2.30 mmb
+0.57 mmb224 mmb
Distillate+2.29 mmb165.7 mmb+1.10 mmb
-4.02 mmb166 mmb

API collects stockpile information on a voluntary basis from operators of refineries, 76% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA