Job openings flat in June but still above historical averages

The Job Openings and Labor Turnover (JOLT) report from the Bureau of Labor Statistics is a good forward indicator of the labor market

The Bureau of Labor Statistics (BLS) compiles data from a random sample of private non-farm businesses. Job openings are one piece of the report. The other is hires versus separations. To be considered as a job opening, the business must have a specific position in mind, be ready to employ someone in the next 30 days, and be actively soliciting candidates for that position.

MR-JOLTSEnlarge Graph

Job growth is the biggest driver of the economy right now, and the unemployment rate is driving the Fed’s quantitative easing program. The activity and decisions of the Fed are probably the biggest driver of returns in the financial sector right now.

3.9 million job openings in June, up 3.8% year-over-year

The 3.9 million job openings are roughly flat with the May report but still above the 3.6 million average since BLS began compiling the index in 2000. In early 2000, the index peaked at close to 5.2 million, and it bottomed at 2.2 million in mid-2009. Most sectors reported increases in openings—even the government. There are still 3.1 unemployed job seekers per job opening.

Implications for mortgage REITs

Given that unemployment is stubbornly high, and the labor force participation rate is the lowest since the Carter Administration, it seems strange to see higher-than-average job openings. One of the biggest features of the job market has been a mismatch between skills available and skills required. Part of this is due to education—factory workers need to be more tech-savvy than ever before. Another consideration is lack of mobility—workers can’t relocate to where the jobs are. Why? Negative equity. This traps workers in areas where there’s a surplus of labor available and depressed real estate values.

Problems like these are likely policy targets. First, this means the Fed will continue to keep short-term interest rates as low as possible to increase home affordability. Second, it means the government will push loan servicers, such as Ocwen (OCN) or Nationstar (NSM), to modify mortgages by lowering principal. Acting FHFA Chairman Ed DeMarco has resisted allowing principal mods to Fannie/Fred/Ginnie loans, but his days may be numbered, as President Obama has nominated Congressman Mel Watt to take his place. Democrats in Congress have been pushing for someone more amenable to principal mods, and they may have gotten their wish—just as Watt was nominated, the Congressional Budget Office released a study claiming that principal mods would reduce the deficit.

The net effect on REITs—such as American Capital (AGNC), Annaly (NLY), or Hatteras (HTS)—will be higher prepayments as the Federal government facilitates refinances. As long as there’s stability in the financial markets, their borrowing rates will remain low. The risk for mortgage REITs is a steepening yield curve, which will cause mark-to-market losses on their portfolios as the Fed withdraws quantitative easing. The Fed has been signaling that it will begin to wind down quantitative easing some time this year. This has caused the ten-year bond to sell off, which has caused mortgage REIT stocks to under-perform the S&P.