Conflicting reports about the labor market
Last week had some important data points, but nothing that could be considered market-moving. The National Federation of Independent Business (or NFIB) Small Business Optimism survey showed that small business is still defensive, although things are improving slowly.
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The state of the consumer continues to be defensive. Retail sales came in well below expectations. Retail giant Walmart (WMT) reported that the low-end consumer is still struggling.
Interestingly, the JOLTS Job Openings report had job openings at 4.7 million—the highest since 2001. Also, the three-month average of initial jobless claims as a percentage of the population is the lowest since the late 1960s. There are indicators showing strength in the labor market. However, we know from observation that the labor market is weak.
Perhaps the numbers are telling us that there are shortages of skilled labor—which we already know. Also, people who are employed aren’t being let go. However, the long-term unemployed still aren’t considered for job openings—as we can see from the low labor force participation rate. There’s excess unskilled labor.
Commercial REITs will be encouraged by economic strength
Implications for mortgage REITs
Mortgage REITs, like Annaly and American Capital Agency (or 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 that the proximity of rate increases would move long-term rates higher. However, it simply hasn’t happened.
Last week didn’t have much in the way of market-moving data, but bonds continued to rally based on concerns overseas and weaknesses in Europe.
Implications for homebuilders
Most of the builders have already reported. The only one left is luxury builder Toll Brothers (or TOL). We already know the high-end buyer is doing just fine.
It appears that the builders are happy to keep increasing prices. They’re willing to live with lower unit growth. At some point, that game won’t work anymore. For now, it appears that the next quantum leap in housing. Getting back to a sense of normalcy—will be an event in 2015.