Mexico
Hike Another Day
December 08, 2009

By Luis Arcentales | New York

The release of Banco de Mexico's new forecasts for 2010 and 2011 reinforced concerns that the central bank was about to embark on a monetary tightening cycle. After postponing the announcement of its new forecasts on October 28 pending the approval of the 2010 tax reform and budget proposals, on December 2 the central bank unveiled its projections for the impact on inflation from higher taxes and administered prices. The revised inflation path - which foresees annual headline inflation as high as 5.25% on average in 3Q10 and 4Q10 - was more aggressive than market expectations. Accordingly, we now see inflation ending 2010 at 4.8% from 3.3% previously. By the end of the week, the swap curve was pricing in as much as 150bp of tightening next year starting in January, compared to just 100bp preceding Banxico's announcement; meanwhile, a survey of economists from late November conducted by a local bank showed that over a third of participants saw a rate hike in 1Q, with well over half expecting tightening in 1H10 for a total of 100bp.    

Contrary to market expectations, Banxico is likely to stay on hold over the course of 2010, in our view, by accommodating the temporary inflationary shock without lifting the policy rate from the current level of 4.50%. The growing ranks of Mexico watchers calling for tightening early next year seem to base their view on the experience of 2007, when, faced with an inflationary shock of similar nature - the IETU tax and the states' tax on gasoline and diesel - Banxico reacted preemptively by signaling a tightening in monetary conditions in October. We find the parallels between the episodes of 2007 and today simplistic for several reasons, including a misunderstanding of the factors that led to the October 2007 tightening - as well as an earlier move in April - the different cyclical backdrops and the risks and visibility surrounding the main source of price pressure, namely fuel prices. At the very least, Banxico's recent guidance that future policy decisions would depend on the evolution of medium-term inflation expectations and potential second-round effects on prices from the changes to taxes and administered quotes seem at odds with an interest rate move in early 2010. 

It's Different This Time

For cues on how the central bank may react to the upcoming inflationary shock, many Mexico watchers have looked back at 2007. In September 2007, congress approved a reform that at the time was expected to lift public sector revenues by 1.1% of GDP in 2008, mainly via the new IETU corporate tax; moreover, as part of the negotiations to approve the fiscal changes, congress also passed a tax on gasoline and diesel, which would be phased in over a period of a year-and-a-half in equal monthly installments, amounting to an effective increase in prices of just over 5%. Banxico followed by predicting that the fiscal reform would lift inflation by 40-50bp in 2008 in its quarterly report released October 31. Less than a week earlier, Banxico surprisingly tightened monetary conditions by 25bp, citing, in addition to potential future food price pressures, the "probable impact of the recently approved tax reform". The policy statement added that the move was aimed at "avoiding possible contamination of the process of price and wage formation mechanism and... moderating inflation expectations", suggesting that the move was preemptive in nature.

Though Mexico once again faces a tax-related inflationary shock, we don't think Banxico will follow a similar script as it did in 2007; instead, the authorities are likely to keep the overnight target unchanged at 4.5% during the course of 2010. First, unlike 2007 when the economy had been expanding almost uninterruptedly since the end of the 2001 recession, today Mexico is just starting to rebound from the deep slump and prospects for recovery carry downside risks. Second, the circumstances that led to the October 2007 rate hike - lingering inflation angst following the turmoil about tortilla prices earlier that year, the questions about Banxico's communication strategy and inflation commitment and the media paranoia about the fuel price hikes - are very different from today's backdrop, when probably the most common criticism of Banxico is how conservative its 375bp easing cycle that ended in July has been. Last, unlike the very visible ‘gasolinazo' of 2007 - as the gasoline and diesel price hikes came to be known - today the magnitude of fuel price hikes next year is unknown; moreover, if fiscal revenues outperform budget targets as we expect, then the finance ministry will be under less pressure to hike fuel prices, thus adding an element of downward risk to most important factor - fuel price adjustments - driving the upward revision to 2010 inflation expectations.   

Economic Bust, but No Future Boom

With the economy slowly emerging from the deepest slump in recent history, Banxico is unlikely to be in any hurry to hike interest rates, despite the inflationary shock. Indeed, the central bank's December 2 report stressed that in light of the 2009 collapse in activity, the output gap is likely to remain negative until 2011, thus limiting any demand-side price pressures and capping the potential impact of the tax reform. Given the central bank's focus on potential second-round effects from the tax reform, ample slack in labor markets - which only started to stabilize during 3Q - should play an important role in limiting the risk to wages. Whereas in 2007 the central bank's monthly survey showed a neutral reading for the question about how difficult it was to hire personnel, today conditions reflect significant slack, even after a recent improvement from historically low levels.

And even if the central bank's high-end estimate for job creation materializes next year (400,000 new positions), it would only represent a fraction of the over 600,000 positions that the economy lost between July of 2008 and 2009, without considering the historical annual growth in the economically active population of around 1.5% or 700,000 people. Not only did Mexico have almost 3 million unemployed in 3Q - the unemployment rate was a record-high 6.3% (3.9% in 3Q07) - but it was also near historically high levels (28.2% of workers or 12.4 million) and almost 9% of workers were considered under-employed, a deterioration of nearly two percentage points from 2007.

As important as the slack currently present in the economy, Banxico remains concerned about the risks regarding the sustainability and strength of the ongoing recovery. This year's recession highlighted how few degrees of freedom Mexico had to engage in counter-cyclical fiscal policy in an attempt to cushion the external blow (see "Mexico: The Fiscal Straightjacket", EM Economist, July 17, 2009). After unveiling two rounds of measures in October and then January - whose principal points were cuts to energy prices worth some 0.4% of GDP and infrastructure projects of 0.5% of GDP - the authorities announced in July that they were planning to cut expenditures by some 0.7% of GDP due to the collapse in revenues (see "Mexico: Against the (Fiscal) Wall", EM Economist, July 24, 2009). 

A great part of Banxico's cautious economic assessment rests in the fact that the economic recovery is likely to be externally driven rather than relying on domestic sources of growth. The rebound in activity during 3Q - which followed five quarters of flat-to-down sequential growth - and at the start of 4Q has been in large part a consequence of the improvement in external demand, which translated into a surge in auto production, an associated pick-up in external trade-related services and, on the domestic side, a normalization in areas such as leisure and hospitality, which were hard-hit by the flu outbreak. And labor markets reflect this narrow-based rebound: between August and October, formal employment expanded at an anemic average sequential pace of less than 1% annualized with all new jobs coming from manufacturing, consistent with Banxico's warning that "the recovery in employment and wage mass will be lagged and gradual and will depend, in great part, on the strength of the global rebound".

Although we are revising our 2010 GDP forecast upward to 3.8% from 2.4% previously, we expect that, absent stronger signs of a domestic-led recovery, Banxico is unlikely to run the risk of tightening prematurely. That would set the central bank up for the risk that if growth were to relapse, it would have to shift gears again. Indeed, our own forecast for 2010 GDP - which exceeds the central bank's upper range of 2.5-3.5% - assumes that industry will make a disproportionate contribution to total GDP growth, reflecting our US team's expectation for a sustained recovery in US manufacturing and auto sales. Absent tangible signs of a domestic-led recovery and faced with a highly uncertain external backdrop, Banxico is unlikely to run the risk of tightening prematurely and, if growth were to relapse, having to shift gears. 

Meanwhile, we are revising our peso forecast for year-end 2010 to 12.5, from 13.8 previously, as the signs of a stronger recovery are likely to be accompanied by an improvement in investor sentiment which, based on the recent rally in the peso, seems to be shifting already. Moreover, though there are lingering question marks regarding Mexico's medium-term fiscal strength, the market action following the downgrade of the country's sovereign rating on November 23 suggests that investors are starting to look beyond the fiscal debate (see "Mexico: Zipping up the Fiscal Straightjacket", EM Economist, October 30, 2009, and "Mexico: Beyond a Double Downgrade", EM Economist, November 20, 2009).  

Similar Shock, Different Backdrop

A tax-related inflationary shock notwithstanding, the circumstances that forced Banxico's hand in October 2007 bear no resemblance to today's situation. In 2007, the tax reform sparked concerns that price setters would use the ‘gasolinazo' as an excuse to jack up prices; indeed, calls for emergency wage hikes were commonplace. By contrast, after a difficult start of the year during which the peso collapsed and inflation remained elevated, Mexico is experiencing a period of steady disinflation and one of the few criticisms of Banxico is the relatively conservative extent of its easing cycle - cumulative 375bp between January and July - given the magnitude of the collapse in activity (see "Mexico: Reassessing the Balance of Risks", EM Economist, April 24, 2009). 

In the period preceding the surprise October 26 rate hike, inflation angst in Mexico was running high. Towards the end of 2006 and early 2007, the prices of probably the most visible, politically sensitive item in the consumer price basket and a mainstay of the diets of Mexico's poor, namely corn tortillas, shot up (see "Mexico: Tortilla Turmoil", EM Economist, January 22, 2007). On January 18, the government announced a series of agreements to cap tortilla prices, in addition to lifting corn import quotas. While this was no more than a supply shock, the visibility of the tortilla price turmoil threatened to spill over into wage negotiations and upset inflation expectations as well, forcing Banxico to issue an uncharacteristic ultimatum that if core inflation failed to decline in March, then it would be forced to tighten policy - thus reducing a future policy action to a rigid, narrow trigger (see "Mexico: Banxico's Ultimatum", EM Economist, March 5, 2007). The subsequent questioning about Banxico's inflation handling and communication strategy - in late May the central bank for the first time introduced a formal ‘bias' while struggling to lay out its commitment to achieving the 3% target by a particular date - were partly behind a surprise April 27 move by Banxico to tighten monetary conditions (see "Mexico: Banco de Mexico's April Surprise", EM Economist, May 4, 2007). All this tension seemed to only intensify with the approval of the tax reform in September.

Though less severe from an inflationary standpoint compared to the recently approved tax reform, the 2007 fiscal reform sparked concerns of meaningful potential price pressures down the road. The ‘gasolinazo' made constant headlines, prompting concerns that price setters would use it as an excuse to hike prices and even leading worker groups to ask for emergency wage hikes. Banxico was not immune to pressure: in its October 2007 policy statement, it justified the tightening move due to the need to prevent contamination of wages and inflation expectations, given probable higher pressures from food and the tax reform.

In 2009, by contrast, concerns about the tax reform have centered on the impact of higher taxation on an economy that is just emerging from a deep slump rather than on its inflationary consequences, in part reflecting the weak cyclical backdrop. Indeed, the exact magnitude of the main source of expected inflationary pressure in 2010, namely higher fuel prices, is not known, in contrast to the very visible and now infamous ‘gasolinazo'. (Ironically, Banxico estimates that regular gasoline will rise by 72 cents over the course of 2010 - an increase of almost 9.5% - which is almost twice the magnitude of the 2007 ‘gasolinazo', which was spread out over a period of 18 months). Moreover, in contrast to 2007 when Banxico seemed to struggle with communicating its intentions to the market - the two tightening moves in April and October were complete surprises to market participants - in 2009 the authorities have been far more transparent and timely in communicating their intentions: not once in its 11 scheduled meetings of 2009 did Banxico surprise the market with the direction of its rate moves, while only surprising in three occasions by the magnitude of the rate cuts (February, March and April). Last, while inflation failed to fall as quickly as the central bank had predicted in early 2009, the main criticism we have heard Mexico watchers express about the central bank actions this year was how conservative it was in easing rates, considering the plunge in economic activity.

Fueling Inflation

Rather than higher taxes, the main source of price pressure in 2010 will be adjustments to energy quotes, according to Banxico's latest forecasts. Higher taxes represent 50bp or 30% of the total impact, with energy adding an extra 76bp or 44% of the total. Though fuel prices are very visible and important to price formation, the magnitude of next year's increase is not known. Not only has Banxico made a relatively conservative set of assumptions regarding fuel prices, but if fiscal revenues outperform budget estimates as we believe, then the pressure on the finance ministry to hike fuel prices would diminish, adding an important element of uncertainty to Banxico's balance of risks. 

In Mexico, the finance ministry has discretion over the pace and magnitude of gasoline and diesel price adjustments. For example, the fiscal authorities hiked fuel prices at an accelerated pace during 2H08, when soaring crude prices caused fuel subsidies to skyrocket (see "Mexico: Heavily Subsidized", EM Economist, June 13, 2008).

By contrast, between January and October of this year, even with fuel prices frozen as part of a stimulus package, subsidies reached just M$3.6 billion, a fraction of the M$196.6 billion in the same period last year. And though large fuel price adjustments could be politically difficult and economically undesirable, they do not require congressional approval. Indeed, even though the finance ministry submits to congress estimates for the exchange rate, the price of oil and estimated revenues (or outlays, in the case of subsidies) from the excise tax on fuels, the implicit adjustments to fuel prices are not publicly known. In fact, we estimate that the 2010 budget's implicit adjustment is in the range of 7-10%, consistent with Banxico's assumption. 

Given the conservative 2010 budget parameters approved by congress, revenues could outperform their targets, thus reducing the need to hike fuel prices aggressively, in our view. The budget assumes GDP growth of just 3.0% with inflation running at 3.3% next year, both of which are quite conservative. Indeed, in our base case scenario, the impact of higher growth and inflation would translate into extra revenues nearing 0.6% of GDP. A stronger currency, which we see at 12.5 next year compared to the budget's 13.8, would have a negative impact on oil receipts, but even accounting for this drag, revenues would outperform budget estimates. The budget estimate of US$59/bbl for the Mexican oil mix, moreover, is another source of potential upside if we compare spot and future prices, which currently stand above US$70/bbl. Overall, there is a strong case, without aggressive assumptions, for additional receipts to the tune of 1.0% of GDP, which would reduce the incentive to rely on fuel price adjustments to plug in any potential revenue shortfall. 

Bottom Line

Despite facing a tax-related inflationary shock, Banco de Mexico is likely to keep its policy stance unchanged over the course of 2010, given the ample slack on the economy, potential downside risk to the main source of price pressure, namely fuel prices, and uncertainty about the sustainability of the ongoing economic recovery. Though risks of tightening seem higher in 2H10 than in the first six months of the year, at the very least Banxico's recent guidance that future policy decisions will depend on the evolution of medium-term inflation expectations and potential second-round effects on prices from changes to taxes and administered quotes seem at odds with the market's pricing of interest rate hikes early next year.   

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United States
Review and Preview
December 08, 2009

By Ted Wieseman | New York

An employment report that was a lot better than even our well-above consensus expectations pounded the Treasury market Friday to cap a rough four-day run of losses.  The price dive began Tuesday with investors feeling less worried about downside risks from a renewal of the financial turmoil as the Dubai situation seemed to be fairly well contained and then shifted later in the week to a focus on the improvement in the economy and labor markets as seen in yet another in a now three-month-long run of better jobless claims reports and then the upside in the monthly employment report.  We had thought that distortions in the seasonal adjustment factors had masked the underlying improvement in the labor market seen in jobless claims in the disappointing October and September employment report, and that this would flip around to provide a good boost to November. This did come through, but the real surprise in the figures relative to our relatively upbeat estimates was how solid the underlying results were beyond any seasonal adjustment problems. While the -11,000 November payroll result likely overstated the degree of improvement last month, the -87,000 three-month average figure is probably a fairly clean read on underlying conditions looking through seasonal adjustment gyrations - and that clearly represents some notable improvement.  We continue to see job growth turning positive early next year.  The yield curve flattened a bit in Friday's post-employment report sell-off, but on the week there was a meaningful bear steepening along with a significant rise in inflation expectations in the TIPS market, as investors are worried that the Fed will remain slow to shift its ultra-dovish stance in line with the improving economy and wait too long to begin executing an exit strategy from quantitative easing.  At this point the Fed continues to rapidly ramp up its liquidity injections by continuing its MBS and agency buying against little remaining offset from the rundown of emergency programs, with the monetary base up another 4% in the latest two-week period and over 100% annualized since mid-August, a policy that seems increasingly inappropriate to us and risky in light of changed economic conditions. Bond market investors will be hoping for some rhetorical movement towards an exit strategy in the mid-month FOMC statement and hoping for at least some toning down of the "exceptionally low levels of the federal funds rate for an extended period" language.  A speech by Fed Chairman Bernanke on Monday will be closely watched for any hints of this and any notable shifts in his cautious economic outlook. 

After four straight days of significant losses ending with Friday's post-employment plunge, benchmark Treasury yields rose 15-27bp over the past week, with the intermediate part of the curve leading the losses as mortgage plunged after rallying to their best levels since the spring on Monday and there were bouts of unwinds of 5s-30s and similar curve-steepening positions.  The 2-year yield rose 15bp to 0.85%, 3-year 17bp to 1.32%, 5-year 21bp to 2.25%, 7-year 27bp to 2.97%, 10-year 27bp to 3.28% and 30-year 21bp to 4.41%.  After their first week of meaningful underperformance in some time during Thanksgiving week, TIPS resumed outperforming even as the dollar rebounded significantly, pressuring commodity prices.  Currency markets at this point seem to have more confidence that the Fed will move towards a less dovish policy stance imminently in light of the employment upside than interest rate markets.  The 5-year TIPS yield rose 14bp to 0.33%, 10-year 20bp to 1.30% and 20-year 18bp to 1.94%.  This lifted the benchmark 10-year inflation breakeven 8bp to 2.18%, only a bit below the high close for the year of 2.23% reached November 9 just after the surprisingly dovish November 4 FOMC announcement.  Mortgages rallied Monday to their lowest yields since the spring, with current coupon yields moving down to near 3.9%, sending 30-year mortgage rates briefly down to 4.5%, but there was a major reversal over the rest of the week that significantly lagged the Treasury market sell-off.  By Friday current coupon MBS yields were up about 30bp on the week near 4.25%, which will probably quickly move 30-year mortgage rates up to around 4.875% to 5%.  The good news is that the poor mortgage performance was partly a result of a significant recent pick-up in mortgage origination activity, as the plunge in rates appears to have sparked a renewed rise in home buying (also seen in a recent rebound in mortgage applications) after an apparent payback in November from sales pulled forward ahead of the originally scheduled expiration of the homebuyers' tax credit.  Even with the back-up in yields seen over the past week, rates will still be at historically low levels, which combined with the huge drop in home prices over the past few years and the extension and expansion of the tax credit leaves housing affordability about as high as it's ever been, so home sales should be well supported going into next year.  Risk markets saw a bit of upside over the past week, but only enough to just about reverse the pullback seen Friday in the brief negative response to the Dubai news before investors became more comfortable that this did not represent a systemic risk.  Equity and credit markets have been close to unchanged for several weeks now amid mostly minimal day-to-day volatility, so they haven't been having much impact on interest rate trading.  To this point, it looks like we're not seeing any sort of year-end correction in risk markets as investors look ahead to year-end but instead more of just a general stalling at levels not far from the highs for the year. 

Non-farm payrolls dipped only 11,000 in November, and there were big upward revisions to October (-111,000 versus -190,000) and September (-139,000 versus -219,000).  Upside in November was led by a 52,000 surge in temps, a positive leading indicator for labor demand.  Other details of the report were strong.  The unemployment rate fell 0.2pp to 10.0%, reversing half of last month's surge.  The average workweek jumped 0.2 hours to 33.2, which along with flat payrolls led to a 0.6% surge in total hours worked.  Manufacturing hours worked were up 0.4%, pointing to a strong industrial production report.  The gain in hours combined with a 0.1% rise in average earnings caused aggregate weekly payrolls, a gauge of total wage and salary income, to rise 0.7%, the biggest gain in two-and-a-half years.  The statistical issues related to seasonal adjustment that we have seen the past couple of weeks played a role in the upside in payrolls, but sorting through the unadjusted data, we saw evidence of a good deal more legitimate strength than we had anticipated.  We had thought that the seasonal adjustment factor for private employment could add as much as 150,000 to the raw data in November.  In fact, the actual add-on was close to zero.  Also, we had cited the likelihood of as much as a 100,000 upward revision to September and October from revised seasonal factors.  In fact, the upward revision was even larger (+159,000), but only about 60,000 or so was attributable to seasonal adjustment.  All of this means that the upside seasonal bias in the November payroll data was not as great as we had thought.  Indeed, there was probably a lot more downward bias in October than upside in November.  Sorting through the volatility of recent months, there is pretty clear evidence of underlying progress towards labor market recovery, which has been evident in the weekly jobless claims data for some time now.  We continue to look for payroll changes to turn positive in early 2010. 

A bunch of releases over the past week directly impacting our GDP forecasts - construction spending, motor vehicle sales, chain store sales, the employment report and factory orders - swung our estimates around a lot but eventually left our 4Q GDP forecast unchanged at +3.1%.  We do, however, now see 3Q growth being adjusted down a bit further to +2.5% from +2.8% (and the +3.5% advance estimate). 

There continues to be an enormous and widening divergence in the construction spending report between a recovering housing market and a severe weakness in private non-residential spending.  Worse-than-expected results for business construction in October on top of major downward revisions to September and August resulted in an unprecedented 29% annualized plunge over the past six months and pointed to a downward revision to business investment in 3Q to -19% from -15%.  And we now see 4Q running at -14% instead of -7%.  This would result in a post-war worst 24% drop for the four quarters of 2009.  Against this severe weakness, single-family housing construction has surged at a 38% annual rate in the past six months.  Even with a significant partial offset from weakness in multi-family activity that has been in line with plunging commercial real estate, we continue to see residential investment gaining 9% in 4Q after a 20% rise in 3Q. 

Early indications for November consumer spending were mixed.  Motor vehicle sales were better than expected, rising to 10.9 million units annualized from 10.4 million in October and 9.2 million in September at the peak of the payback from cash for clunkers.  This was the best month outside of when cash for clunkers boosted July and August (and nearly as high as July) since September 2008 and suggested that auto sales have decent underlying momentum as we move past the incentive-driven volatility.  On the other hand, chain store sales were disappointing in November, pointing to softer results for ex auto retail sales after a good rebound from August through October.  In a positive sign for the key holiday shopping season, however, a number of major retailers indicated that the sales in the days after Thanksgiving were solid in the first rush of holiday buying, just not enough so to offset a weak period through the fist part of the month.  With the upside in autos offset by a softer outlook for ex autos, we continue to see 4Q consumption running at +2.0%. 

There were a couple of positives for 4Q to offset the construction weakness and mixed consumer spending indications.  The factory orders report pointed to a bigger contribution from inventories to 4Q GDP and slightly better investment spending.  Manufacturing inventories gained 0.4% in October, the first gain in quite a while.  Building this in and even assuming a lot of it was price-driven inflation instead of real, we now see inventories adding 1.9pp to 4Q GDP instead of +1.6pp.  Also in the factory orders report, non-defense capital goods ex aircraft shipments were unrevised, but underlying details by sector were positive for investment spending, and we boosted our 4Q equipment and software investment forecast to +1% from 0%.  In addition, incorporating upside in state and local government payrolls from the employment report, we raised our state and local government spending forecast in 4Q GDP to +2% from +1%.

The November retail sales report on Friday is the main release in a fairly quiet upcoming week for economic data.  There's not much data of note in the first part of the week, which will leave Treasury market focus largely on the latest flood of supply - US$40 billion 3s, US$21 billion 10s and US$13 billion 30s - as well as Fed Chairman Bernanke's Monday speech.  The 3-year size was unchanged this month, while the 10-year and 30-year sizes were each increased by US$1 billion from the last reopenings in October.  This was a similar shift as seen at the 2-year, 5-year and 7-year in late November - 2-year size unchanged but 5-year and 7-year raised US$1 billion each.  So it's becoming increasingly clear that the Treasury's plan to rapidly extend the average maturity of the outstanding debt is now shifting to altering relative issuance sizes towards longer maturities within coupon sales on top of boosting coupon supply while paying down bills.  In addition to Friday's retail sales report and an increasingly close focus on rapidly improving jobless claims, which signaled improving labor market conditions a lot earlier than they finally showed up in the monthly report, notable data releases in the coming week include the trade balance and Treasury budget balance Thursday:

* We expect the trade deficit to widen another half a billion dollars in October to US$37.0 billion after the nearly US$6 billion increase in September, with both exports (+1.0%) and imports (+1.1%) likely to extend their recent sharply improving trends.  On the export side, factory shipments figures pointed to a decent gain in high-tech products, while higher prices should help boost industrial materials.  On the import side, cargo data from the key West Coast ports pointed to good upside in imports from Asia ahead of the holiday shopping season.

* We expect the federal government to report a US$114 billion budget deficit for November, about US$10 billion narrower than in the same period a year ago.  The modest improvement largely reflects an absence of spending on the financial system rescue package that showed up in the November 2008 budget statement.  On an underlying basis, the budget situation shows signs of only a slight narrowing.  So, we continue to look for a deficit of about US$1.4 trillion (or 9% of GDP) in F2010.

* We look for a 0.7% gain in overall retail sales in November and a 0.6% rise ex autos.  Unit sales of motor vehicles showed a decent gain in November, so we look for a solid advance in the auto dealer category.  Also, we should see a sharp price-related jump in the gas station component.  But, the chain store reports were disappointing, so we have pared back our expectation for non-auto discretionary spending and now look for only a 0.2% rise in the key retail control gauge - several ticks below the performance seen in recent months.  We suspect that the November softness may be at least partly attributable to unseasonably mild weather in some parts of the nation and calendar effects.  Encouragingly, a number of major retailers indicated that holiday shopping got off to a good start after weak sales results before Thanksgiving.  

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