Given the Fed’s focus on unemployment, the monthly jobs report is by far the most important monthly economic report
The Fed has stated over and over that it will be guided by changes in the labor market when making monetary policy decisions. It also focuses on inflation, but the low level of inflation is giving the Fed the leeway it needs to target employment. The Fed has given guideposts about raising interest rates (unemployment of 6.5% and inflation below 2.5%), and has already begun to reduce its footprint in the asset markets.
Highlights of the report
The economy added 175,000 jobs in February—higher than the consensus forecast of 149,000. January was revised upward to 129,000 jobs from 113,000. The unemployment rate ticked up to 6.7% from 6.6%, and the labor force participation rate was flat at 63%, which harkens back to the days of disco. Average hourly earnings increased 0.4% month-over-month, and the average workweek was dropped to 34.2.
In any other month, this report would have been considered weak to merely okay and would not have had much of an effect. This month however, we had the backdrop of the Ukranian situation, and the Street was leaning long going into the report. Bonds sold off heavily on the news.
Implications for mortgage REITs
The mortgage REIT sector has had a difficult time over the past nine months. Rates have been increasing, as has volatility. We’ve seen large declines in book value per share as the sector struggles to de-leverage in a hostile environment. This sort of volatility gives mortgage-backed security investors conniptions.
Since rates started increasing, American Capital Agency (AGNC) and Annaly (NLY) are down a lot. The REITs that focus on adjustable-rate mortgages, like MFA Financial (MFA) and Hatteras (HTS), have fallen less but are still down double-digit percentages. Both Annaly and American Capital Agency have decided REITs are too cheap and are increasing the size of their balance sheets. Investors who want to make directional bets on interest rates should look at the iShares 20+ Year Bond ETF (TLT).
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