US data released yesterday once again missed market expectations. Consumer spending, pending home sales and factory orders all came below consensus and exacerbated worries over a US slowdown. Wall Street plunged with DJIA and S&P500 losing -0.4% and -0.5% respectively. Risk aversion increased with the VIX soaring +2.8% to 22.63. Treasuries rallied amid speculations on US QE. Commodities were mixed with oil and gold strengthening and base metals a tad lower.

Personal income was flat (consensus: +0.3%) in June following a downwardly revised +0.3% gain in May. Wage and salary income dropped for the first time since February, by -0.1% m/m, but rise +1.2% on annual basis. Personal spending was also unchanged after a +0.2% rise in May. The market had anticipated another month of small gain (+0.2%). The savings rate rose to 6.4%, the highest in a year, from 6.3% in May. While the results had been incorporated into 2Q10 GDP, the stagnant readings reminded the markets how a weak job market is hurting consumption, the largest part of the economy.

Factory orders contracted -1.2% m/m in June, compared with an expected flat reading, after a -1.4% decline in May. This is another sign after the ISM manufacturing index that the sector will cool in coming months.

What's more worrying is probably pending home sales which plunged -2.6% m/m in June following a huge -30% slump a month ago. The disappointment evidenced that housing demand has continued to shrink after the tax credit expired.

Against a backdrop of slowing US economic growth, talks of further QE measures by the Fed have turned more rigorous. Some of the market players have been speculating the central bank will resume the bond-buying program at the upcoming FOMC meeting. These speculations have boosted the Treasury and sent US 2-year government bond yields to a record low. Bond markets elsewhere also strengthened.

As we mentioned yesterday, low yields are positive for gold. Currently approaching 1200, the yellow metal edged higher yesterday. Apart from QE measures, gold was boosted as China relaxed rules to trade the metal. The People's Bank of China said in a statement that the country will allow its banks to export and import more gold and hedge their positions in gold in overseas markets. It will also encourage gold derivatives to be denominated in RMB and develop the gold leasing market. While we do not anticipate the central bank will buy gold aggressively after the move, the open up of the gold should gradually spur domestic demand and increased investment channels should help boost gold prices.

Crude oil rallied for a 4th straight day with the front-month contract settling at 72.55, up +1.48%. Although there have been concerns over demand as economic recovery slows, price surged as the dollar weakened further and API reported draw in crude oil inventory. According to API, crude oil inventory dropped -0.776 mmb to 355.6 mmb in the week ended July 30. Gasoline and distillate stockpiles, however, rose +2.3 mmb and +1.1 mmb, respectively.

Weekly change in inventory as of 30/07/10 ChangeMarket Expectation Previous
Crude oil  -1.50 mmb+7.31 mmb
Gasoline  -1.00 mmb+0.09 mmb
Distillate  +1.00 mmb+0.94 mmb

Comparison between API and EIA reports:

API (Jul 30)

EIA (Jul 30 )


Forecast (using API's inventory level)Inventory
Crude oil-0.78 mmb355.6 mmb+3.08 mmb


356 mmb
+2.30 mmb224.6 mmb+0.88 mmb
+2.33 mmb225 mmb
Distillate+1.10 mmb166.4 mmb+0.41 mmb
-4.15 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