Last week was a mixed bag as far as data is concerned
In terms of economic data last week, we had a number of reports, which were worrisome. First, retail sales came in weaker than expected increasing just 0.1% versus expectations of a 0.4% increase. That said, March’s already impressive numbers were revised upward. Ex autos, gasoline, and building products fell 0.1%.
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On Thursday, we had some important manufacturing data released, with industrial production, manufacturing production, and capacity utilization. It looks like March’s weather-related spike was just that, as production fell back and capacity utilization returned to prior levels. Those of us hoping for a recovery summer were undoubtedly disappointed by this data.
Finally, on Friday, we had a better-than-expected housing starts report, with starts again above one million. Building Permits topped one million as well. One million starts look good only compared to the last five years. Previously, it would have been considered a terrible number. Housing has been punching below its weight for this entire recovery, and that explains why the rebound has been somewhat anemic and unsatisfying.
Commercial REITs will be encouraged by economic strength
Commercial REITs in the retail space, like Simon Property (SPG) and General Growth Properties (GGP), will certainly be disappointed in the retail sales numbers. Of course retail spending isn’t the only thing that drives mall REITs, but it is an important factor. Office REITs like Vornado Realty Trust (VNO) will undoubtedly be disappointed in the manufacturing data, as it doesn’t exactly point to economic strength going forward.
Implications for mortgage REITs
Mortgage REITs, like Annaly (NLY) and American Capital (AGNC), are driven by interest rates, which have been in a tight trading range. Investors are becoming more comfortable with the idea that the Fed isn’t looking to raise rates too soon (people seem to have digested the possibility, although it’s probably unlikely, that the Fed will start hiking rates at the June 2015 FOMC meeting). Last week, we heard from Annaly Capital, which reported lower-than-expected earnings.