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Morning Report: Awaiting the Fed

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Vital Statistics:

Stocks are up as we enter Fed Week. Bonds and MBS are up as well.

The upcoming week will be dominated by the FOMC meeting on Tuesday and Wednesday, however we will have a lot of data as well. We will get house price data on Tuesday, the FOMC decision on Wednesday, GDP on Thursday, and the PCE inflation index on Friday.

The Chicago Fed National Activity Index remained in negative territory last month, with most indicators suggesting a national slowdown. The CFNAI is sort of a meta-index that tracks some 85 economic indicators.

It is pretty remarkable to think that after 500 basis points of tightening, the economy is still as strong as it is. I talked about it my latest substack piece: Where is the recession we were promised? The answer is that we are somewhere between ludicrous speed and ridiculous speed.

Rithm Capital (aka New Rez) agreed to buy Sculptor, an asset manager with $34 billion in assets under management. It looks like a bolt-on acquisition for Rithm, as Sculptor’s current management will run the company. Sculptor gets access to more permanent capital, and I guess Rithm gets to diversify into non-mortgage related businesses which will help smooth the insane cyclicality of the mortgage business. Note that AGNC Investment and Rithm Capital are the only mortgage REITs that haven’t cut their dividends in response to the Fed’s tightening policy.

The economy expanded modestly in July, according to the Flash Composite PMI.

“July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation. The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter. That’s down from a 2% pace signaled by the survey in the second quarter. However, growth is being entirely driven by the service sector, and in particular rising spend from international clients, which is helping offset a becalmed manufacturing sector and increasingly subdued demand from US households and businesses.
Furthermore, business optimism about the year-ahead outlook has deteriorated sharply to the lowest seen so far this year. The darkening picture adds downside risks to output growth in the coming months which, alongside the slowing in the pace of expansion in July, will keep alive fear that the US economy may yet succumb to another downturn before the year is out. The stickiness of price pressures meanwhile remains a major concern. As the survey index of selling prices has acted as a reliable leading indicator of consumer price inflation, anticipating the easing to 3% in June, it sends a worrying signal that further falls in the rate of inflation below 3% may prove elusive in the near term.”

Sunday Night Futures

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