U.S. producer prices drop for second straight month

WASHINGTON, Feb 14 (Reuters) – U.S. producer prices fell for a second straight month in January, leading to the smallest annual increase in 1-1/2 years, the latest sign of benign inflation that could allow the Federal Reserve to be patient about raising interest rates this year.

The Labor Department said on Thursday its producer price index for final demand dipped 0.1 percent last month as the cost of energy products and food fell. The PPI dipped 0.1 percent in December.

In the 12 months through January, the PPI rose 2.0 percent. That was the smallest gain since July 2017 and followed a 2.5 percent rise in December. Economists polled by Reuters had forecast the PPI edging up 0.1 percent in January and increasing 2.1 percent on a year-on-year basis.

A key gauge of underlying producer price pressures that excludes food, energy and trade services rose 0.2 percent last month after being unchanged in December.

The so-called core PPI increased 2.5 percent in the 12 months through January, the smallest gain since January 2018, after rising 2.8 percent in December.

The report came on the heels of data on Wednesday showing consumer prices were unchanged in January for a third straight month. Inflation remains tame despite a tightening labor market that is starting to push up wage growth, buttressing the Fed’s pledge to be “patient” before raising interest rates further.

Last month, wholesale energy prices fell 3.8 percent after declining 4.3 percent in December. Wholesale food prices dropped 1.7 percent last month after rising 2.6 percent in December.

Overall, the cost of wholesale goods tumbled 0.8 percent in January after falling 0.3 percent in the prior month. Core goods rose 0.3 percent after edging up 0.1 percent in December. The cost of services rose 0.3 percent in January after being unchanged in the prior month.

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U.S. to meet Taliban in Islamabad on Feb. 18: Taliban spokesman

KABUL (Reuters) – Taliban negotiators will meet their U.S. counterparts on Feb. 18 in Pakistan’s capital Islamabad as part of accelerating diplomacy to end more than 17 years of war in Afghanistan, Taliban spokesman Zabihullah Mujahid said on Wednesday.

But a U.S. State Department representative said in a statement that the United States had “not received a formal invitation to any talks.”

The talks would come a week ahead of previously scheduled negotiations between the two sides in Qatar on Feb. 25. Mujahid said in a statement that the Qatar talks would still take place as scheduled.

Mujahid said his side would also meet Pakistan’s Prime Minister Imran Khan to hold “comprehensive discussions about Pakistan-Afghanistan relations”.

While he said the Taliban delegation would meet the U.S. team, he did not specify any meetings with team head, U.S. special peace envoy Zalmay Khalilzad.

Khalilzad is due in Pakistan ahead of the Qatar talks as part of a six-country swing through Europe and the Middle East as he tries to build support for efforts to end America’s longest war.

Both the hardline Islamist movement and the United States hailed progress after the end of the last round of negotiations in Qatar last month but Western diplomats familiar with discussions say that many tough hurdles lie ahead.

The U.S. side is expected to push hard for a ceasefire between Taliban insurgents and foreign-backed Afghan forces before any agreement on the withdrawal of U.S.-led foreign troops.

Taliban officials say they want all foreign troops out before a ceasefire, but would still welcome non-military foreign help to re-build the country.

Washington is also seeking more details on fresh assurances from the Taliban that it would not allow Afghanistan to be used by groups such as al-Qaeda and Islamic State to attack the United States and its allies, Western diplomats said.

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  • U.S. says it has not received an invitation to talks with Taliban in Pakistan

It is also pushing for the Taliban to talk to the Afghan government, which it has so far shut out of talks, branding it as a puppet of Washington.

U.S. President Donald Trump used his State of the Union address last week to say progress in negotiations with the Taliban would allow a reduction in the approximately 14,000 U.S. troops currently in Afghanistan and a renewed “focus on counter terrorism.”

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Wall Street extends gains as trade talks progress

NEW YORK (Reuters) – Wall Street extended its gains on Wednesday as investor optimism was stoked over hopes that the United States and China could iron out a trade deal, and tame inflation data suggested the Fed would hold interest rates steady in the near term.

All three major U.S. stock indexes were up, and the S&P 500 held above its 200-day moving average, a key technical level.

In Beijing, U.S. Treasury Secretary Steven Mnuchin said “so far, so good,” regarding ongoing talks aimed at resolving the U.S.-China trade dispute, adding that he hoped for “productive” meetings in the days ahead.

“The market is ahead of itself until we get a deal with China,” said Matthew Keator, partner in the Keator Group, a wealth management firm in Lenox, Massachusetts. “It seems to be a bit of a moving target, but it seems both sides are willing to construct a deal.”

The U.S. Labor Department reported that consumer prices were unchanged for the third consecutive month in January, and increased at their slowest annual pace in more than 1-1/2 years in a sign that the Federal Reserve could let interest rates stand for a while.

Fourth-quarter earnings season approaches the finish line, with more than two-thirds of S&P 500 having reported.

While analysts now see fourth-quarter earnings growth of 16.6 percent, the outlook for the current quarter is less auspicious.

Fourth-quarter profit is projected to fall 0.3 percent from a year ago, marking the first loss since the earnings recession that ended in 2016, according to Refinitiv data.

“Volatility in the fourth quarter was a precursor to what we’re seeing now,” said Keator. “Companies are resetting expectations going forward.”

The Dow Jones Industrial Average rose 90.76 points, or 0.36 percent, to 25,516.52, the S&P 500 gained 8.17 points, or 0.30 percent, to 2,752.9 and the Nasdaq Composite added 19.29 points, or 0.26 percent, to 7,433.91.

Of the 11 major sectors in the S&P 500, all but utilities were in positive territory.

Energy companies were among the biggest percentage gain as oil prices saw their largest increase since late January.

Groupon Inc sank 12.1 percent, among the biggest losers on the Nasdaq as reduced traffic led to a fourth-quarter profit miss.

Generic drugmaker Teva Pharmaceuticals Industries Inc dropped 7.8 percent after forecasting a weaker-than-expected 2019 due to new competition for branded drugs.

General Electric Co advanced 3.1 percent following news that the conglomerate booked the most orders for electricity-generating gas turbines in 2018.

Levi Strauss & Co filed documents for an IPO after more than three decades as a privately-held company. Rivals Abercrombie & Fitch, Gap Inc and American Eagle Outfitters Inc dropped on the news.

Cisco Systems’ stock was down 0.8 percent ahead of its earnings release, expected after the bell.

Advancing issues outnumbered declining ones on the NYSE by a 1.80-to-1 ratio; on Nasdaq, a 1.40-to-1 ratio favored advancers.

The S&P 500 posted 35 new 52-week highs and no new lows; the Nasdaq Composite recorded 67 new highs and 15 new lows.

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Newly patient Fed still set to hike rates in 2019, 2020: Harker

(Reuters) – The U.S. Federal Reserve’s new “wait and see” policy approach will still probably lead to one interest-rate hike before year end, and another in 2020, a top Fed official said on Wednesday.

Offering a clearer picture of his policy expectations than most other U.S. central bankers, Philadelphia Fed President Patrick Harker said the U.S. economy is generally in good shape and risks are only very slightly tilted to the downside.

“One rate hike for 2019 and one for 2020 are appropriate,” Harker, a centrist who does not vote on rates this year, said in his first expansive speech on monetary policy since July.

“With a temperate climate for inflation, continued strength in the labor market, very slight downside risks, solid but moderate growth projections for the next couple of years, and of course a climate of uncertainty, I continue to be in wait-and-see mode,” he said.

The Fed raised rates four times last year including in December in the face of hot economic growth and the lowest unemployment in decades. But in a shift last month, it said the tightening cycle was on hold in the face of economic weakness overseas and an expected slowdown at home.

Financial markets have effectively priced out any further rate hikes this year and see a rate cut as more likely in 2020. This despite Fed policymakers’ forecasts from December signaling rates were headed a bit higher over the next couple of years.

Several Fed policymakers have stressed patience in recent weeks and some, including Atlanta Fed President Raphael Bostic and Charles Evans of the Chicago Fed, have sketched out expectations for more tightening this year.

Addressing the Jewish Business Network in Philadelphia, Harker said his policy views would shift along with data. For now, he expects U.S. growth to be a bit above 2 percent in 2019 and sees U.S. inflation rebounding from a recent slump to rise a bit above 2 percent this year and next.

“I see patience as a virtue,” he said.

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U.S. negotiators to meet Taliban delegation in Islamabad on Feb. 18: Taliban spokesman

KABUL (Reuters) – Taliban negotiators will meet their U.S. counterparts on Feb. 18 in Pakistan’s capital Islamabad as part of accelerating diplomacy to end more than 17 years of war in Afghanistan, Taliban spokesman Zabihullah Mujahid said on Wednesday.

The talks come a week ahead of previously scheduled negotiations between the two sides in Qatar on Feb. 25. Mujahid said in a statement that the Qatar talks would still take place as scheduled.

Mujahid said his side would also meet Pakistan’s Prime Minister Imran Khan to hold “comprehensive discussions about Pakistan-Afghanistan relations”.

While he said the Taliban delegation would meet the U.S. team, he did not specify any meetings with team head, U.S. special peace envoy Zalmay Khalilzad.

Khalilzad is due in Pakistan ahead of the Qatar talks as part of a six-country swing through Europe and the Middle East as he tries to build support for efforts to end America’s longest war.

Both the hardline Islamist movement and the United States hailed progress after the end of the last round of negotiations in Qatar last month but Western diplomats familiar with discussions say that many tough hurdles lie ahead.

The U.S. side is expected to push hard for a ceasefire between Taliban insurgents and foreign-backed Afghan forces before any agreement on the withdrawal of U.S.-led foreign troops.

Taliban officials say they want all foreign troops out before a ceasefire, but would still welcome non-military foreign help to re-build the country.

Washington is also seeking more details on fresh assurances from the Taliban that it would not allow Afghanistan to be used by groups such as al-Qaeda and Islamic State to attack the United States and its allies, Western diplomats said.

It is also pushing hard for the Taliban to talk to the Afghan government, which it has so far shut out of talks, branding it as a puppet of Washington.

U.S. President Donald Trump used his State of the Union address last week to say progress in negotiations with the Taliban would allow a reduction in the approximately 14,000 U.S. troops currently in Afghanistan and a renewed “focus on counter terrorism.”

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Lower gasoline prices restrain U.S. consumer inflation

WASHINGTON (Reuters) – U.S. consumer prices were unchanged for a third straight month in January, leading to the smallest annual increase in inflation in more than 1-1/2 years, which could allow the Federal Reserve to hold interest rates steady for a while.

The Labor Department’s report on Wednesday supported the Fed’s recent description of price pressures being “muted.” In a policy statement last month, the U.S. central bank kept rates unchanged, pledged to be “patient” before tightening monetary policy further and discarded promises of “further gradual increases” in borrowing costs.

“Inflation still appears to be well in check,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan. “That should be enough for the Fed to take time to evaluate the gradual effects of its prior rate hikes and move more slowly and thoughtfully in administering rate policy in the months ahead.”

The Consumer Price Index last month was held down by cheaper gasoline, which offset increases in the cost of food, rent, healthcare, recreation, apparel, motor vehicles and household furnishings. In the 12 months through January, the CPI rose 1.6 percent, the smallest gain since June 2017. The CPI increased 1.9 percent on a year-on-year basis in December.

Excluding the volatile food and energy components, the CPI gained 0.2 percent, rising by the same margin for a fifth straight month. In the 12 months through January, the so-called core CPI rose 2.2 percent for a third straight month.

Economists polled by Reuters had forecast the CPI edging up 0.1 percent in January and the core CPI rising 0.2 percent.

While the steady increases in core inflation resulted in the biggest three-month annualized gain in 10 months, economists said they did not believe it signaled a material shift in underlying inflation trends.

“The Fed will be focused more on longer time frames,” said Eric Winograd, senior economist at AllianceBernstein in New York. “The quarter-on-quarter annualized figure has moved both higher and lower without signaling any meaningful change in the year-on-year rate before.”

The dollar rose against a basket of currencies as traders focused on the three-month rise in the core CPI. Prices of U.S. Treasuries fell. Stocks on Wall Street were trading higher amid optimism that the United States and China could strike a deal during trade talks in Beijing.

LITTLE UPSIDE RISK

Despite the increases in the core CPI, underlying inflation remains moderate. The Fed, which has a 2 percent inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy.

The core PCE price index increased 1.9 percent on a year-on-year basis in November after rising 1.8 percent in October. It hit 2 percent in March 2018 for the first time since April 2012. PCE price data for December will be released on March 1.

It was delayed by a five-week partial shutdown of the federal government that ended on Jan. 25.

Inflation is remaining moderate despite a tightening labor market, in part because of slowing economic growth in China and Europe, which is helping to lower oil prices.

“We don’t see a ton of upside risk to inflation over the next several months,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “The unemployment rate could fall even further without stoking significant inflation, since the slope of the Phillips curve remains flat.”

The Phillips curve describes the relationship between inflation and unemployment. It holds that as unemployment declines, inflation should rise. In the current environment, the lack of a strong inflation impulse suggests there is no danger of the labor market overheating.

In January, gasoline prices fell 5.5 percent after dropping 5.8 percent in December. Food prices increased 0.2 percent, rising for a third straight month. There were increases in the prices of poultry, eggs, fish and beef. But consumers paid less for fruits, vegetables, cereals and dairy products.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3 percent in January after gaining 0.2 percent in the prior month. The cost of postage stamps jumped 1.7 percent, the most since February 2013.

Healthcare costs rose 0.2 percent after advancing 0.3 percent in December, with doctor visits costing more. Apparel prices surged 1.1 percent last month, the biggest increase since February 2018.

Airline fares dropped 0.9 percent. The cost of motor vehicle insurance fell for a third straight month.

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EU brings industry together to tackle dollar dominance in energy trade

BRUSSELS/LONDON (Reuters) – The European Union has convened a wide-ranging industrial group to work on promoting the euro and fighting the monopoly of the U.S. dollar in oil and commodities trading, reflecting broader tensions with Washington over trade and sanctions.

The group, which involves executives from European oil firms such as OMV and Eni and gas and power firms such as Fluxys and Engie, will meet behind closed doors in Brussels under the auspices of the European Commission on Thursday.

The workshop is part of an EU push to challenge the dominance of the dollar, with an EU official saying such a shift must be market-led.

Participants are invited to dig into “constraints on (market-initiated) alternatives to the use of U.S. dollar through wider use of the euro, in spite of the benefits of such a change”, the Commission said in materials prepared for the meeting.

The meeting, part of a consultation process until mid-2019, is expected to provide new input to EU plans for promoting the euro in energy trading.

“The EU is the world’s largest energy importer with an annual energy import bill averaging 300 billion euros in the last five years. Roughly 85 percent of this amount is paid in U.S. dollars,” according to the materials for the meeting.

Other major commodities producers and importers such as Russia and China have also long sought to increase the role of other currencies in commodities trading.

    “Washington doesn’t like cartels like OPEC,” said one participant involved in preparing for the meeting, referring to the Middle East-dominated Organization of the Petroleum Exporting Countries.

“But then how can you have one market dominated by one currency – the dollar.”

Some industry players are skeptical, however, and not participating in the meeting as they say making space for the euro in international payments is too long-term a process.

“More than promotion, you need reforms, stability and convincing investors,” a senior central banker said, airing widespread doubts at the European Central Bank about the Commission plan.

ECB officials have said the only way to boost the international role of the euro is to strenghten the European monetary union with banking and financial reforms that EU states have blocked for years.

DOLLAR DOMINANCE

The move follows a U.S. decision to withdraw from an agreement with Iran on Tehran’s nuclear program, with many EU companies such as France’s Total saying they were forced to stop buying Iranian oil even for euros because of fears of secondary U.S. sanctions.

The U.S. dollar clearing mechanism allows the United States effectively to control all electronic bank transactions and go after anyone who it believes is in breach of its rules.

Earlier this year, several European buyers suspended purchases of Venezuelan crude due to fears of U.S. secondary sanctions even though they were not formally forbidden from buying oil under the latest U.S. curbs.

Tensions between the United States and the EU over the role of the dollar go back even longer.

In 2014, Washington fined BNP Paribas $9 billion for trading Iranian and Sudanese oil, with the French bank agreeing a settlement under the threat of losing access to dollar clearing.

In the 20 years since its adoption, the euro’s international role peaked at the beginning of the last decade. Its use dropped during the 2007-08 financial crisis.

The euro has not recovered since, and the dollar remains the currency most used in the world. Sixty percent of sovereign debt issuance and global foreign exchange reserves are in dollars. The euro is the second global currency, but its share of each market is just 20 percent.

The Commission has previously admitted that dollar dominance was due to higher liquidity, lower transaction costs and its use as a benchmark in commodities and derivatives markets – prerogatives that can hardly be challenged in the short term.

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Cheaper gasoline restrains U.S. consumer prices

WASHINGTON (Reuters) – U.S. consumer prices were unchanged for a third straight month in January, leading to the smallest annual increase in inflation in more than 1-1/2 years, which could allow the Federal Reserve to hold interest rates steady for a while.

The Labor Department said on Wednesday its Consumer Price Index last month was held down by cheaper gasoline, which offset increases in the cost of food and rents.

In the 12 months through January, the CPI rose 1.6 percent, the smallest gain since June 2017. The CPI increased 1.9 percent on a year-on-year basis in December.

Excluding the volatile food and energy components, the CPI gained 0.2 percent, rising by the same margin for a fifth straight month. In the 12 months through January, the so-called core CPI rose 2.2 percent for a third straight month.

Economists polled by Reuters had forecast the CPI edging up 0.1 percent in January and the core CPI rising 0.2 percent.

The dollar rose against a basket of currencies after the data, while U.S. stock index futures held gains. Prices of U.S. Treasuries were trading lower. Despite the increases in the core CPI, underlying inflation remains moderate. The Fed, which has a 2 percent inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy.

The core PCE price index increased 1.9 percent on a year-on-year basis in November after rising 1.8 percent in October. It hit 2 percent in March 2018 for the first time since April 2012. PCE price data for December will be released on March 1.

It was delayed by a five-week partial shutdown of the federal government that ended on Jan. 25.

The Fed kept interest rates unchanged last month and removed from its December policy statement promises of “further gradual increases” in borrowing costs. The U.S. central bank said it would be “patient” before making further rate hikes.

MORE EXPENSIVE FOOD

With the January inflation report, the government started quality adjusting the CPI series related to telecommunications services such as land-line telephones, internet, cable and satellite television, to account for rapid technological change.

Inflation is remaining moderate despite a tightening labor market, in part because of slowing economic growth in China and Europe, which is helping to lower oil prices.

In January, gasoline prices fell 5.5 percent after dropping 5.8 percent in December. Food prices increased 0.2 percent, rising for a third straight month.

Food consumed at home edged up 0.1 percent last month. There were increases in the prices of poultry, eggs, fish and beef. But consumers paid less for fruits, vegetables, cereals and dairy products.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3 percent in January after gaining 0.2 percent in the prior month. The cost of postage stamps jumped 1.7 percent and households paid more for land-line telephone services.

Healthcare costs rose 0.2 percent after advancing 0.3 percent in December, with doctor visits costing more. Apparel prices jumped 1.1 percent last month, the biggest increase since February 2018.

There were also increases in the prices of new motor vehicles as well as used cars and trucks. Airline fares dropped 0.9 percent. The cost of motor vehicle insurance fell for a third straight month.

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Fed to finalize plans to end balance sheet runoff 'at coming meetings': Mester

CINCINNATI (Reuters) – The Federal Reserve will chart plans to stop letting its bond holdings roll off “at coming meetings,” Cleveland Fed President Loretta Mester said on Tuesday, signaling another major policy shift for the Fed after pausing interest rate hikes.

“At coming meetings, we will be finalizing our plans for ending the balance-sheet runoff and completing balance-sheet normalization,” Mester said in remarks prepared for delivery in Cincinnati. “As we have done throughout the process of normalization, we will make these plans and the rationale for them known to the public in a timely way because transparency and accountability are basic tenets of appropriate monetary policymaking.”

The Fed built up its balance sheet in the aftermath of the 2007-2009 financial crisis, buying trillions of dollars of bonds in an effort to push down longer-run borrowing costs after it slashed short-term borrowing costs to near zero.

It began retreating from its crisis-era policy in 2015, first by raising interest rates and then in October 2017 by allowing its balance sheet to slowly shrink by no longer replacing all maturing bonds with an equal amount of new bonds. The monthly runoff was capped at $50 billion to minimize any impact on financial markets.

But late last year, prominent investors took to blaming the Fed’s balance sheet runoff for market volatility.

President Donald Trump took up the drum beat against the program in December, tweeting at the Fed to “stop with the 50 B’s,” a reference to the $50 billion monthly cap.

Fed Chairman Jerome Powell said in late January that the U.S. central bank could wind down its asset-shedding operation sooner than thought and end that process with a bigger balance sheet than earlier anticipated. The Fed also said it would be “patient” in determining whether to raise rates further.

In recent weeks policymakers have signaled other changes may be in the offing.

On Friday, San Francisco Fed President Mary Daly said policymakers were considering whether they to use bond purchases not just as a last resort in a financial crisis but perhaps even before the Fed has done as much as it can with rate cuts alone.

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Former Fed Chair Paul Volcker takes Trump to task on taxes, trade

(Reuters) – Former Federal Reserve Chairman Paul Volcker warned the Trump administration’s handling of domestic issues as well as trade talks with China is hurting the United States’ long-term prosperity.

“We have not been on a constructive track,” Volcker told Bridgewater co-chief investment officer Ray Dalio, in a podcast video released on Tuesday. “I think that’s fair to say.”

Volcker, widely credited with ending the high levels of inflation seen in the United States during the 1970s and early 1980s, said Trump’s big tax cuts and spending increases underscore the lack of transparency of the president’s administration.

“We rammed through a massive tax bill. Whatever you think about that tax bill, it shouldn’t have been rammed through Congress without any debates at midnight on Dec. 31,” Volcker said.

On Dec. 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act, shrinking the corporate tax rate from 35 percent to 21 percent and cutting taxes on private businesses by about 20 percent. It was passed without a single public hearing.

Volcker cites Alexander Hamilton, his hero and first secretary of the Treasury, as saying “the true test of good government is its ability to administer” which Volcker said “we lapse in.”

Trump has had a strained relationship with the Federal Reserve. As Fed rate increases continued through last year, Trump called the central bank “crazy,” out of touch with markets, and according to reports, explored whether he could remove current Fed Chair Jerome Powell.

Volcker said the China trade negotiations have been particularly worrisome for the United States’ future over the next 10 years.

“It sounds terrible but I respond more favorably to what the president of China is saying than the president of the United States,” Volcker said. “The president of China, at least, says he’s looking forward to a harmonious relationship over time…But looking for peaceable outcomes, where we are all threats and demands, so it’s a different story being told.”

U.S. and Chinese officials expressed hopes on Monday that a new round of talks would bring them closer to easing their months-long trade war. Beijing and Washington are trying to hammer out a deal before a March 1 deadline, without which U.S. tariffs on $200 billion worth of Chinese imports are scheduled to increase to 25 percent from 10 percent.

All told, Volcker said: “Faith of the America people in our government today is really distressing. There’s been polls taken every year that ask the same question … Do you trust your government to do the right thing most of the time? You get maybe 20 percent to say ‘yes.’ You ask about the Congress, it’d be less than 20 percent. It’s no great secret that we are torn about by ideological and other differences now.”

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