Takeaways from the FOMC minutes
There were two big takeaways from the FOMC minutes. The first concerned the labor market and the belief that there’s less slack in the labor market than originally thought. The effect of this will be to lower the “speed limit” of the U.S. economy. This means the the Fed considers many of the long-term unemployed to be retired.
The second big takeaway was the change in discussion over how to handle the Fed’s massive balance sheet. Previously, the Fed had committed to maintain net exposure on its balance sheet by re-investing maturing securities back into the market. Now the Fed is not only contemplating letting the balance sheet run off, but also possibly selling its holdings. This will be important for mortgage REITs like Annaly (NLY) and American Capital Agency (AGNC).
Commercial REITs will be encouraged by economic strength
Implications for mortgage REITs
Mortgage REITs, like Annaly and American Capital Agency (AGNC), are driven by interest rates. Rates have continued to move lower. This has surprised many strategists and analysts who were predicting the end of quantitative easing (or QE). They thought the proximity of rate increases would move long-term rates higher. But that simply hasn’t happened.
Last week didn’t have much in the way of market-moving data. But the Fed’s discussion of what to do with its holdings of mortgage-backed securities will certainly affect them.
Implications for homebuilders
Most builders have already reported. The only one left is luxury builder Toll Brothers (TOL). We already know the high-end buyer is doing just fine.
Housing starts and building permits were strong. But much of the growth was in the notoriously volatile multi-family sector. Existing home sales increased as well, showing that the real estate market continues to heal.
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