Commodities Rise as Fed Inclines to Expand Asset Buying and Anchor Inflation Expectations

13 October 2010 13 October 2010

BonTrade

High gold price triggered profit-taking and the benchmark contract fell to as low as 1341.1 before closing at 1346.7, down -0.57%. Yet, the uptrend remained intact and the yellow metal gained buying interests again as the September FOMC minutes indicated Fed officials have come closer to a consensus of additional easing. The minutes were more dovish than previously anticipated as, apart from discussions of further asset purchases, policymakers talked about strategies to anchor inflation expectations. Moreover, many members believed more accommodative actions should be taken 'before long'. Crude oil price rebounded strongly after sliding below 81 as Fed's QE approach boosted optimism. The front-month contract ended the day at 81.67, down -0.66%. Today in Asia, commodities advanced with gold and WTI crude oil trading at 1359 and 82.1 respectively. Weakness in USD increased the appeal of these assets.

Policymakers had intense discussions about adding further accommodative measures to boost the recovery in the September FOMC meeting. According the minutes, Fed members focused exclusively on long-term Treasury securities regarding the asset-purchase program. Besides expanding the balance sheet, the members believed it's important to anchor the market's inflation expectations. Most participants indicated that underlying inflation was at levels 'below those that they judged to be consistent with the Committee's dual mandate for maximum employment and price stability' while some noted that 'TIPS-based inflation compensation had declined, on balance, in recent quarters'. The Committee worried that a decline in short-term inflation expectations would increase short-term real interest rates, hence dampen aggregate demand. Strategies discussed during the meeting for affecting short-term inflation expectations included 1) providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, 2) targeting a path for the price level rather than the rate of inflation, and 3) targeting a path for the level of nominal GDP.

The minutes heightened speculations that the Fed will announce more easing measures at the November meeting as it appeared that policymakers have moved closer to that direction. This is negative for the dollar but positive for gold.

Crude oil rose for the first time in 3 days in Asian session. Apart from a lift by weakness in USD, OPEC's upgrade of global oil demand also helped. The cartel lifted its forecast for global oil demand to 85.59M bpd, up from 85.5M bpd projected a month ago. This also represented an +1.3% increase from the demand in 2009. Consumption will increase +1.2% y/y to 86.64M bpd in 2011 (September: 86.56M bpd). Over the past 2 days, the market dumped oil amid expectations that the OPEC will leave production quotas unchanged at the October meeting. Moreover, White House's decision to lift its ban on deepwater drilling ease concerns over supplies.