US Treasury yields rallied as driven by strong economic data: PPI in November gained +0.8%, beating consensus of +0.5% and +0.4% in October. Retail sales grew +0.8% m/m November while the October reading was revised higher to +1.7%. Sales excluding auto soared +1.2%. US dollar rebounded from a 3-week low and 10-year Treasury yields closed at 3.473%, the highest level since May 2010. The December FOMC meeting delivered few surprises but yields were higher after the statement showed modest upward revision on the economic outlook. The recovery in oil prices was limited by strength in USD. The front-month contract for WTI crude oil price faltered after rising to 88.95 and closed at 88.28, down -0.37%. Gold remained resilient despite rises in yields and USD with the benchmark Comex contract gaining +0.43% during the day. China's upward revision on inflation target is supportive for gold.
The Fed decided to leave the Fed funds rate unchanged at 0-0.25%, maintaining that interest rates will stay 'exceptionally low' for an 'extended period', and the asset-purchase program at $600B. The growth outlook was revised modestly higher. The Fed said that the economic recovery is 'continuing, though at a rate that has been insufficient to bring down unemployment'. Consumer spending is 'increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit'. In November, the Fed said the 'pace of recovery in output and employment continues to be slow' while consumer spending was 'increasing gradually'. Inflation outlook was, however, described as trending downward. 10-year yield rose +6 bps to 3.46% after the release of the statement.
In China, the government raised the inflation target for 2011 to 4% from previous projection of 3%. We expect this acknowledgement of higher inflationary pressure would stimulate demand for gold. Meanwhile, the US this week raised trade pressure on China. While senators sending requests on including a Chinese currency manipulation bill in the tax legislation, the WTO rejected China's appeal against US tariffs on tyre imports earlier this week. Trade spats between the US and China, if persists, could lift gold prices.
Crude oil inventory fell -1.44 mmb to 247.81 mmb in the week ended December 10, according to American Petroleum Institute. Gasoline and distillate stockpiles, however, rose +2.42 mmb and +2 mmb respectively. The US Energy Department will probably report declines in crude and distillate but rise in gasoline inventories.
