U.S. Weekly Watch

Tax Deal
President Obama announced a bipartisan fiscal agreement for the next two years. The deal
extends the expiring Bush tax cuts for all income bracket rates, as well as the Earned Income
Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit. It also avoids tax
rate hikes on estates and reduces the payroll tax by 2pp for employees, which substitutes the
expiring Making Work Pay (MWP) tax credit. In addition, the deal extends the unemployment
insurance benefit for another 13 months and will allow businesses to write off 100% of their
investment in 2011, instead of 50% proposed back in September. In total, these measures
add up to around $800bn or 5% of GDP. The size of this agreement is similar to the
American Recovery and Reconstruction Act of 2008 and 5 times the size of the Economic
Stimulus Act of 2008. Lower tax rates and tax credits have a positive fiscal multiplier effect
that will boost GDP growth in 2011-12. According to our estimates, the impact on GDP
growth could be around 0.3 to 0.9% for 2011, and 0.2 to 0.6% for 2012. However, the
proposal increases fiscal deficit and debt levels; complicates future fiscal consolidation.

Wholesale Inventories
The U.S. Census Bureau announced that wholesale inventories hiked 1.9% in October,
significantly higher than market expectations and revised wholesale inventories in September
from 1.5% to 2.1%. The report also revealed that the sales of merchant wholesalers, except
manufacturers’ sales branches and offices, increased by 2.2% in October and jumped 13.4%
in the last 12 months. The inventories-to-sales ratio was flat (1.18) in October. Although the
ratio is higher than its historical low level of 1.13, it is still lower than its historical average of
1.25. The ratio reached its highest level, 1.42, in January 2009. Last month the Bureau of
Economic Analysis announced that private inventories contributed 1.3pp of the 2.5%
annualized growth in 3Q10 and the October wholesale inventories report indicates that the
positive contribution of inventories to the economic recovery is likely to continue in 4Q10.


Week Ahead
Retail Sales, ex auto (November, Tuesday 08:30 ET)
Forecast: 0.7%, 0.6% Consensus: 0.6%, 0.7% Previous: 1.2%, 0.4%
Retail sales increased by 1.2% in October. Auto sales were one of the main drivers of this
increase which jumped 4.4% from the previous month. The U.S. Commerce Department
previously announced that auto sales  in the U.S.  increased only 0.1% in November after
increasing strongly by 2.4% and 4.4% in the previous two months. Furthermore,  the
ICSC/UBS Retail Chain Store Sales Index  rose 1.1% in  November following a three
consecutive month fall and  personal consumption expenditures are strong in the last
couple months. Therefore, we expect retail sales continue to increase significantly.

CPI, core (November, Wednesday 08:30 ET)
Forecast: 0.2%, 0.1% Consensus: 0.2%, 0.1% Previous: 0.2%, 0.0%
U.S. consumer prices increased by 0.2% in October, slightly lower than expected. The
increase in headline consumer prices was mostly driven by an increase in energy prices,
whereas the rise in the gasoline index accounted for almost 90% of the increase in
headline prices. In October, the increases in food prices slowed down and rose only 0.1%
compared to 0.3% in the previous month. In the last 12 months, consumer prices have
risen 1.2%. Core inflation was flat for the third month in a row and dropped to its  lowest
level on a YoY basis. Core consumer prices increased only by 0.6% over the last 12
months in October. We expect deflationary pressures to remain in the short- and mid-term.

Industrial Production (November, Wednesday 09:15 ET)
Forecast: 0.3% Consensus: 0.3% Previous: 0.0%
Industrial production (IP) was flat in October and disappointed market participants who
were expecting a 0.3% increase. IP dropped 0.1% in the previous month. Although
manufacturing production has been increasing steadily in the last four months by 0.4% on
average, economic activity in the utilities sector continued to decrease. In the last three
days, the utilities production index declined by 2.2% on average. Therefore, while the total
capacity utilization rate remained at 74.8%, the capacity utilization rate in utilities declined
2.8pp to 76.6% in October. We expect modest growth in the IP index in November.

Housing Starts (November, Thursday 08:30 ET)
Forecast: 545K Consensus: 550K Previous: 519K
Housing starts are expected to remain low in November  due to weak demand for new
homes. Even though the decline in new home sales has stabilized, the market has not
experienced the same renewed demand as that of existing homes. Although new housing
inventory is at its historical minimum, the low level of the Confidence Housing Market
Index suggests that home builders are not willing to increase the supply of new housing
yet. However, we expect housing starts to improve slightly in November.

Market Impact
A very busy week is ahead. Flat consumer prices and a drop in IP (after two months of
weak IP data) in November would imply that the current deflationary prices are strongerthan-expected and would increase anxiety about deflation.
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