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What a rate hike in 2022 might mean for “Stonks”

On November 3, 2021, Jerome Powell made it clear the Fed only cares about "stonk" prices – and here’s how we see this as relevant to the possible rate…

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This article was originally published by Real Investment Advice

On November 3, 2021, Jerome Powell made it clear the Fed only cares about “stonk” prices – and here’s how we see this as relevant to the possible rate hike in 2022. Employment is just an excuse to keep the monetary pedal to the metal.

“We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation.” – Jerome Powell

While his concern for the labor situation seems legitimate, if you peel back the onion, it appears he might have an ulterior motive for not raising rates.

The potential motive lies in the following statement:

“The Fed’s policy actions have been guided by our mandate to promote maximum employment and stable prices for the American people along with our responsibilities to promote the stability of the financial system.”

As we show in this article, the economy is pretty much at maximum employment. Inflation is running red hot and increasingly showing signs it may be persistent. Having neglected one mandate and largely fulfilled the other, why is the Fed so slow to reduce asset purchases and unwilling to contemplate a rate hike in 2022?

Before we answer the question, we share data on the two congressionally chartered Fed mandates, price stability, and maximum employment. Examining the data shows there is something else accounting for recent Fed’s policy actions, or better said, lack of action.

Price Stability

“The risk is skewed now, and it appears to be skewed toward higher inflation”

“Overall inflation is running well above our 2% longer-run goal.”

Powell is crystal clear at his November 3, 2021, press conference that inflation is running hot. No one in their right mind can say the Fed is meeting their mandate for “stable prices.”

The graph below shows seven indicators of annual inflation rates. We use standard deviation, or sigma, to normalize the seven measures. They are all overextended significantly. In other words, there a very few instances of higher inflation than today in the last 30 years.

Inflation

On the sole basis of prices, the Fed should be aggressively removing crisis-level monetary accommodations and enacting a rate hike in 2022 to make prices “stable.”

Senator Rick Scott of Florida, in a letter to Chairman Powell, agrees: “Today, American families are faced with rising prices and inflation not seen in 30 years – this is surely not ‘price stability.’

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Maximum Employment

Inflation is relatively easy to measure with a single number. While we may question the veracity of any inflation figure, we can all agree prices are rising. Employment is not so easy to measure.

“So maximum employment is, we say broad-based and inclusive goal that’s not directly measurable and changes over time due to various factors. You can’t specify a specific goal. So it’s taking into account quite a broad range of things. And of course, levels of employment, participation are part of that.”- Jerome Powell 11/3/2021

The pandemic changed behaviors making some data even more challenging to assess. As such, let’s review traditional and alternative data and see if employment is back to normal.

The Unemployment Rate

As shown below, the popular U3 Unemployment Rate, at 4.6%, is only 0.2% above the average of the five years preceding the pandemic. One can argue that period was abnormal as it posted the lowest level of unemployment since the 1960s.

employment

The U6 Unemployment Rate is not as well followed as the U3 shown above. U6 includes those unemployed in the U3 number but also those underemployed and discouraged from seeking jobs. Jerome Powell thinks the U6 figure is a more credible indicator given the pandemic-related dislocations. As shown below, the U6 rate is 0.4% below the average of the five years leading to the pandemic.

unemployment

Both traditional measures show the Fed has met its employment mandate.

Labor Participation Rate

Jerome Powell uses the word “participation” seven times in his most recent press conference. The paragraph below has three of them.

“The unemployment rate was 4.8% in September. This figure understates the shortfall in employment, particularly as participation in the labor market remains subdued. Some of the softness in participation likely reflects the aging of the population and retirements, but participation for prime-aged individuals also remains well below pre-pandemic levels.”

In his mind, a weak labor participation rate is a sign of labor weakness. The BLS calculates the Labor participation rate by dividing the labor force by the total working-age population.

The graph below shows the labor participation rate is about 1.5% below pre-pandemic levels.

unemployment participation rate

Why?

Why are some measures of employment back to normal yet the participation rate slow to recover?

People have left jobs for several reasons. In many instances, it appears people are voluntarily leaving their jobs. For example, some parents are now staying at home with their kids. In other cases, those on the cusp of retiring retired from their jobs. More recently, the number of people quitting jobs is increasing, as workers look for a better or higher-paying job.

  • The female labor force participation rates show that women aged 35-44 is still down about 3% from pre-pandemic levels. The participation rate for women aged 25-34 is down about half a percent. Women aged 35-44 are much more likely to have school-aged children than the younger cohort.
  • The Wall Street Journal graph below shows the share of the population that retired since the pandemic rose by about half a percent above its trend.
population
  • The graph below shows, the Labor Quits rate is up .6% since the pandemic started.
Employment

While difficult to quantify, when adjusted for voluntary actions, like those above, the participation rate is likely back to where it was before the pandemic.

Job Openings

Other alternative indicators are telling us the labor market is robust as well. For instance, the graph below shows there are 1.7 jobs available for every person that lost a job during the pandemic. The data lags BLS data but will likely show further improvement in the months ahead.  

pandemic

The labor market is fully recovered for those willing and able to work. The Fed has met its mandate. 

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It’s All About “Stonks”

Stonks is a meme that purposely misspells stocks. The term is used on social media to imply many stock traders have a vague understanding of the stock market. The preponderance of amateur “Stonk” investors helps explain why valuations are extreme and disconnected from reality.

The Fed, through its operations, fosters such a speculative and, dare we say, reckless environment. For more on this, please read The Fed is Juicing Stocks.

Regardless of whether it is direct or indirect, the “Fed put” encourages risk-taking. Why not buy more “stonks” and take on more risk? The Fed has your back in the event of a downdraft. This was true once again in March of 2020. 

Let’s revisit a Powell quote: “The Fed’s policy actions have been guided by our mandate to promote maximum employment and stable prices for the American people along with our responsibilities to promote the stability of the financial system.”

More specifically, he states: “Our asset purchases have been a critical tool. They helped preserve financial stability early in the pandemic. And since then, have helped foster smooth market functioning and accommodate financial conditions to support the economy.”

Financial stability and smooth market functioning translate to higher asset prices. Paradoxically, at current extreme valuations, financial markets are now more unstable than at just about any other time in history.

This is not news to the Fed. In their most recent Financial Stability Report, they note – “Asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate.”

Investor risk sentiment is very sensitive to Fed’s actions. You do the math, it’s all about “stonks, stonks, and more stonks.” 

From The Horses Mouth

If you do not believe us listen to them.

The following editorial is from the guy that ran QE operations for the Fed.

“I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.” – Andrew Huszar 2013 –LINK

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Summary on the possibility of a rate hike in 2022

Powell’s rationale for not reducing QE quicker or raising rates is either a lie or poor analysis. Either way, the labor market is nearly as strong as any time in the last thirty years.

Prices are far from stable. Inflation is running hot, and the odds of supply-related shortages putting pressure on prices seem to grow by the day.

While markets seem calm and healthy, valuations portend they are incredibly risky.

Based solely on the two Fed mandates and their “responsibility” to “foster smooth market functioning” they should halt QE immediately and implement a rate hike in 2022 at the latest.

They won’t because doing so would harm the financial markets, and that it seems trumps everything at the Fed.

The post What a rate hike in 2022 might mean for “Stonks” appeared first on RIA.








Economics

Rabobank: Brushing Up Our Greek Alphabets

Rabobank: Brushing Up Our Greek Alphabets

By Michael Every of Rabobank

Brushing up our Greek alphabets

After a ‘sell first, ask questions…

Rabobank: Brushing Up Our Greek Alphabets

By Michael Every of Rabobank

Brushing up our Greek alphabets

After a ‘sell first, ask questions later’ Friday, markets regained some confidence on Monday. News that Omicron may lead to relatively mild symptoms may have helped the mood, though much about the new strain still remains unclear, including how infectious it is compared to other variants and whether it requires updated vaccines. The health ministers of the G7 issued a joint statement that contained little new information on the strain, but did warn that it “requires urgent action”. European equities also defied news that Germany is now the next country to consider stricter measures to curb the rise in cases.

The risk-on tone weighed on fixed income, with 10y Bund yields rising 2bp on the day, though that reverses only part of Friday’s decline. And the German inflation numbers didn’t provide much support for Bunds either. High inflation was already expected, with a 5.5% consensus forecast. Nevertheless, the German HICP managed to surpass that, as prices rose 6.0% y/y in November. With similar inflation rates already observed in other European countries, including Spain (5.6%) and Belgium (5.6%), a high Eurozone-aggregate HICP today shouldn’t come as a surprise.

In addition to German inflation being higher than expected, it was also a bit more broad-based: certainly, energy was an important contributor, but clothing, furnishing and household equipment, and particularly recreation and culture -though notably a volatile component- also drove prices higher. Despite the wider base of inflationary pressures, that doesn’t take away from the fact that most of these effects are probably still temporary factors that result from the reopening of the economy, supply chain disruptions, and the changes to German VAT at the start of the year. Indeed, the Bundesbank had already warned for a near-6% inflation rate this month, and the ECB’s Isabel Schnabel stated in a TV interview that “November will prove to be the peak.”

Nikkei reported some reassuring news to that extent, noting that the supply chain disruptions in the auto sector are starting to ease. According to the newspaper, the global supply of chips used in the auto industry may finally be improving: “after months of shortages, inventories have risen for the first time in nine months.” While it may still take some time before shortages across the entire supply chain are resolved, this does suggest that some bottlenecks are indeed gradually easing, boding well for both price pressures and for the output of one of Germany’s key industries. That said, bear in mind that the chip shortages were at the forefront of the global disruptions; since then shortages in many other materials and sectors have followed.

The rebound in China’s manufacturing PMI may also offer some reassurance about the recovery of the global value chain. The headline recovered to an expansionary reading of 50.1, but this may understate the improvements in actual output, seeing that one of the main drags on this headline relates to a sharp decline in energy prices faced by manufacturers. This likely reflects the government’s interventions in the coal sector, boosting production. Bloomberg reports that the National Development and Reform Commission met with coal producers last week and that prices would have to be guided towards to a “reasonable range”.

That is, of course, assuming that omicron does not throw a spanner in the works here. It certainly does make central bankers’ jobs that bit harder again. Fed Chair Powell said yesterday that the new strain, as well as the general rise in Covid-19 cases, poses downside risks to the full employment mandate and adds uncertainty to the inflation outlook. While he didn’t specifically mention any implications for the Fed’s current policy trajectory, it adds to the markets’ doubts whether the FOMC will still decide to accelerate the pace of tapering in its December meeting, and whether the market wasn’t too aggressive in its pricing of rate hikes next year. EUR/USD continues to find some support in this revaluation of potential for US policy moves.

Certainly, uncertainty also clouds the ECB’s decisive December meeting. However, with a more dovish starting point, that is less of a marked change. If anything, the European Central Bank may want to commit less in December, leaving more options open for earlier in the year when the Governing Council has more clarity on the outlook and omicron’s impact. A key case in point are Vice President De Guindos’ remarks on the TLTRO-IIIs this morning: he is clear that “the TLTROs are not finished yet”, confirming that -in his view- this year’s long-term liquidity providing operations certainly weren’t the last. However, he added that “it’s not going to be a decision we discuss in December”. Assuming that the future of (or rather after) PEPP will still be decided in December, that does put much more weight on the few other tools the ECB could use to mitigate the expected end of pandemic purchases. This could set markets up for an initial disappointment.

Tyler Durden
Tue, 11/30/2021 – 10:45






Author: Tyler Durden

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Economics

Watch Live: Powell, Yellen Weigh In On Omicron, Debt Ceiling During Senate CARES Act Testimony

Watch Live: Powell, Yellen Weigh In On Omicron, Debt Ceiling During Senate CARES Act Testimony

With the new year just weeks away, Treasury…

Watch Live: Powell, Yellen Weigh In On Omicron, Debt Ceiling During Senate CARES Act Testimony

With the new year just weeks away, Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell will testify before the Senate Banking Committee on Tuesday, part of routine testimony required by the CARES act.

Just two weeks ago, investors could be forgiven for writing off Tuesday’s testimony as a likely snoozefest now that Powell has been nominated for his second term as Fed chairman. But over the last week, the emergence of the omicron variant has (according to some) thrown the recovery timeline out of whack. After the release of Powell’s prepared remarks last night, markets eagerly priced in a more dovish outlook at the Fed.

But hours later, warnings from Moderna CEO Stephane Bancel sent markets back into turmoil, as investors struggled to decide who to trust more: the “science” (ie trial data which haven’t yet been gathered or released), or the authoritative executives who have been talking their book this entire time (whether the market realizes that or not is unclear).

In yet another indication of just how confused Wall Street has become, Deutsche Bank described Powell’s prepared testimony as “hawkish”, an assessment that we (and plenty of investors, judging by the market reaction) would strongly disagree with. Although DB specifies that the only hawkish aspects of Powell’s statement pertained to inflation.

We would agree with DB that nobody cares much about the pair’s prepared remarks. The “real fireworks” – as DB put it – will likely land during the Q&A, where Powell and Yellen will be grilled by Senators of both parties.

Fed Chair Powell set to appear before the Senate Banking Committee at 15:00 London time, where he may well be asked about whether the Fed plans to accelerate the tapering of their asset purchases although it’s hard to believe he’ll go too far with any guidance with the Omicron uncertainty. The Chair’s brief planned testimony was published on the Fed’s website last night. It struck a slightly more hawkish tone on inflation, noting that the Fed’s forecast was for elevated inflation to persist well into next year and recognition that high inflation imposes burdens on those least able to handle them. On omicron, the testimony predictably stated it posed risks that could slow the economy’s progress, but tellingly on the inflation front, it could intensify supply chain disruptions. The real fireworks will almost certainly come in the question and answer portion of the testimony.

Keep in mind: regardless of what Moderna CEO Bancel says, only a tiny minority on Wall Street actually expect omicron to be a major issue a few weeks from now.

But that still presents some difficulties for the central bank as it weighs whether to continue tapering asset purchases, as well as what it should signal regarding the pace of rate hikes.

Read Yellen’s prepared remarks, released Tuesday morning:

Chairman Brown, Ranking Member Toomey, members of the Committee: It is a pleasure to testify today. November has been a very significant month for our economy, and Congress is a large part of the reason why. Our economy has needed updated roads, ports, and broadband networks for many years now, and I am very grateful that on the night of November 5, members of both parties came together to pass the largest infrastructure package in American history.

November 5th, it turned out, was a particularly consequential day because earlier that morning we received a very favorable jobs report– 531,000 jobs added. It’s never wise to make too much of one piece of economic data, but in this case, it was an addition to a mounting body of evidence that points to a clear conclusion: Our economic recovery is on track. We’re averaging half a million new jobs per month since January.

GDP now exceeds its pre-pandemic levels. Our unemployment rate is at its lowest level since the start of the pandemic, and our economy is on pace to reach full employment two years faster than the Congressional Budget Office had estimated. Of course, the progress of our economic recovery can’t be separated from our progress against the pandemic, and I know that we’re all following the news about the Omicron variant.

As the President said yesterday, we’re still waiting for more data, but what remains true is that our best protection against the virus is the vaccine. People should get vaccinated and boosted. At this point, I am confident that our recovery remains strong and is even quite remarkable when put it in context. We should not forget that last winter, there was a risk that our economy was going to slip into a prolonged recession, and there is an alternate reality where, right now, millions more people cannot find a job or are losing the roofs over their heads.

It’s clear that what has separated us from that counterfactual are the bold relief measures Congress has enacted during the crisis: the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act. And it is not just the passage of these laws that has made the difference, but their effective implementation. Treasury, as you know, was tasked with administering a large portion of the relief funds provided by Congress under those bills. During our last quarterly hearing, I spoke extensively about the state and local relief program, but I wanted to update you on some other measures. First, the American Rescue Plan’s expanded Child Tax Credit has been sent out every month since July, putting about $77 billion in the pockets of families of more than 61 million children.

Families are using these funds for essential needs like food, and in fact, according to the Census Bureau, food insecurity among families with children dropped 24 percent after the July payments, which is a profound economic and moral victory for the country. Meanwhile, the Emergency Rental Assistance Program has significantly expanded, providing muchneeded assistance to over 2 million households. This assistance has helped keep eviction rates below prepandemic levels.

This month, we also released guidelines for the $10 billion State Small Business Credit Initiative program, which will provide targeted lending and investments that will help small businesses grow and create well-paying jobs. As consequential as November was, December promises to be more so. There are two decisions facing Congress that could send our economy in very different directions. The first is the debt limit. I cannot overstate how critical it is that Congress address this issue. America must pay its bills on time and in full. If we do not, we will eviscerate our current recovery. In a matter of days, the majority of Americans would suffer financial pain as critical payments, like Social Security checks and military paychecks, would not reach their bank accounts, and that would likely be followed by a deep recession. The second action involves the Build Back Better legislation.

I applaud the House for passing the bill and am hopeful that the Senate will soon follow. Build Back Better is the right economic decision for many reasons. It will, for example, end the childcare crisis in this country, letting parents return to work. These investments, we expect, will lead to a GDP increase over the long-term without increasing the national debt or deficit by a dollar. In fact, the offsets in these bills mean they actually reduce annual deficits over time. Thanks to your work, we’ve ensured that America will recover from this pandemic. Now, with this bill, we have the chance to ensure America thrives in a post-pandemic world. With that, I’m happy to take your questions.

And readers can find Powell’s prepared remarks, first released last night, below:

Chairman Brown, Ranking Member Toomey, and other members of the Committee, thank you for the opportunity to testify today.

The economy has continued to strengthen. The rise in Delta variant cases temporarily slowed progress this past summer, restraining previously rapid growth in household and business spending, intensifying supply chain disruptions, and, in some cases, keeping people from returning to work or looking for a job. Fiscal and monetary policy and the healthy financial positions of households and businesses continue to support aggregate demand. Recent data suggest that the post-September decline in cases corresponded to a pickup in economic growth. Gross domestic product appears on track to grow about 5 percent in 2021, the fastest pace in many years.

As with overall economic activity, conditions in the labor market have continued to improve. The Delta variant contributed to slower job growth this summer, as factors related to the pandemic, such as caregiving needs and fears of the virus, kept some people out of the labor force despite strong demand for workers.

Nonetheless, October saw job growth of 531,000, and the unemployment rate fell to 4.6 percent, indicating a rebound in the pace of labor market improvement.

There is still ground to cover to reach maximum employment for both employment and labor force participation, and we expect progress to continue.

The economic downturn has not fallen equally, and those least able to shoulder the burden have been the hardest hit. In particular, despite progress, joblessness continues to fall disproportionately on African Americans and Hispanics.

Pandemic-related supply and demand imbalances have contributed to notable price increases in some areas. Supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Increases in energy prices and rents are also pushing inflation upward. As a result, overall inflation is running well above our 2 percent longer-run goal, with the price index for personal consumption expenditures up 5 percent over the 12 months ending in October.

Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate. It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year. In addition, with the rapid improvement in the labor market, slack is diminishing, and wages are rising at a brisk pace.

We understand that high inflation imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation. We are committed to our price-stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.

The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.

To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission.

We at the Fed will do everything we can to support a full recovery in employment and achieve our price-stability goal.

Thank you. I look forward to your questions.

The big question now: will Powell sound dovish, or hawkish, under questioning? What’s more, investors should be on the lookout for Yellen’s comments on the debt ceiling – particularly anything she says about the timing for when the Treasury might run out of funds.

Tyler Durden
Tue, 11/30/2021 – 09:56







Author: Tyler Durden

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Economics

Whiplash Price Action Continues

There’s no shortage of volatility in the markets this week and today we’re seeing the negative side of that…

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There’s no shortage of volatility in the markets this week and today we’re seeing the negative side of that, with Europe down around 1% and US futures not far behind.

The old adage that markets hate uncertainty couldn’t be more true and it’s going toe to toe with another well-known force, investors’ love of dips. It’s been so beneficial over the years, backed by endless central bank cash, so you can’t blame them. But on this occasion, they may be swimming against the tide as the downside risks are potentially severe.

It’s was encouraging over the weekend to hear that cases appear more modest, which drew dip buyers in on Monday. But huge uncertainty still remains and we’re seeing that in action today, as Moderna Chief Executive Stéphane Bancel warned current vaccines will be far less effective against Omicron.

This whipsaw price action could become a regular feature over the next couple of weeks as information on the variant trickles out and we get a much better understanding of what we’re dealing with. For now, markets will remain very sensitive to indications that vaccines may not protect us this winter as much as we hoped.

This brings us to central banks and what they intend to do if countries are forced to impose tight restrictions and lockdowns. It’s always assumed that they’ll just turn the taps on, drown the market in liquidity and save the day. But throughout the experiment of the last decade or so, they’ve never had to contend with high inflation, rather the theoretical risk of it.

Are they really going to be so keen to flood us with QE this time around? Or is the best we can hope for that they don’t raise rates for a few months and pause the tightening cycle before it’s really begun. And at what cost given that lockdowns may exacerbate the supply-driven inflationary pressures and give central banks a worse headache. That could be a drag for equity markets in the near term.

Of course, this is all hypothetical at this point and a bit of good news on the vaccine front would quickly get investors back on board and allow central banks to proceed with cautious tightening. But the early signs from the actual experts suggest there is something to worry about with Omicron, which may be a shock to the system this winter.

Euro buoyed by higher inflation data but shouldn’t get carried away

The euro is rallying strongly after eurozone inflation soared to 4.9% in November – a record high – led by higher energy prices, while the core reading also blew past expectations rising to 2.6%. The single currency had been on the rise all morning after the French data surpassed expectations, as did Germany and Spain on Monday. Ultimately though, I don’t think it changes much as far as the ECB is concerned. Euro area inflation will ease after the turn of the year and as a result the central bank is not among those that will be feeling the pressure at this stage.

Lira hit again as economy grows slower than expected

The lira is getting hit once again after reports that the CBRT Executive Director for Markets has left their post. The dollar broke back above 13 against the lira after the reports and remains above there despite paring some of those gains, which also came after the country reported growth of 7.4% in the third quarter, a little shy of expectations.

The currency remains extremely vulnerable to further losses as President Erdogan continues to fiercely oppose higher rates and the central bank shows no sign of changing its approach, rather its staff.

Bitcoin seeing strong support despite market risk aversion

Bitcoin bounced back strongly on Monday, along with other risk assets, but failed to break back above USD 60,000 and has come under pressure once again today. What’s interesting though is it appears to have found support around USD 56,000 again, ahead of last week’s lows which may suggest we’re seeing a flurry of bargain hunters hoping to capitalise on the recent 20%+ dip.

It seems premature given the wild swings we’re seeing in sentiment at the moment and risks to the downside that Omicron poses. But bitcoin has performed well since the start of the pandemic and perhaps there’s a view that should central banks be forced to step in, bitcoin could benefit once more. I guess we’ll see if that turns out to be the case.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

Author: Craig Erlam

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