Important economic data
Last week had some extremely important economic data, with the ISM report, construction spending, GDP, and the jobs report. The advance estimate of first quarter GDP came in at 0.1%, which was blamed on the weather. Construction spending came in below expectations at a 0.2% increase, while the prior month was revised downward. A couple big investment banks revised their estimate for Q1 GDP to negative growth after the construction spending numbers. On Friday, we saw big growth in non-farm payrolls and a decrease in the unemployment rate. However, wage growth was nonexistent and the labor force participation rate dropped right back to 62.8%, which has been the post-crisis low and was last seen when disco ruled the charts. The last time the labor force participation rate was this low was the first quarter of 1978.
The Fed meets
On Wednesday, we had the FOMC meeting, and nothing really surprising came out of it. Rates maintained at current levels, and the Fed chose to reduce asset purchases by another $10 billion a month. The Fed reiterated that it might decide to keep rates exceptionally low even after unemployment and inflation hit the Fed’s targets.
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 take comfort in the ISM report and the jobs report. This will undoubtedly be good news for office REITs like Boston Properties (BXP) and Vornado (VNO).
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 also heard from American Capital Agency, which reported better-than-expected earnings.