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Rate decision: Why last week’s FOMC results surprised no one



The highlight of last week was the FOMC rate decision

The highlight of last week was the FOMC rate decision. The Fed maintained the Fed funds rate and reduced asset purchases by $10 billion a month. The dot graph had no changes from the prior FOMC meeting (where bonds sold off on the “as soon as six months” comment). The Fed took down its 2014 GDP forecast pretty substantially based on the weak first quarter. The consumer price index came in a tough hotter than expected, but Yellen dismissed the report as “noisy” in her press conference.

Fed funds target

We also had housing starts and building permits, which came in disappointing. We seem to be stuck at this new level of 1 million units a year, which is way below the historical average of 1.5 million units a year.

Finally, we had some key industrial data points with industrial production, capacity utilization, and manufacturing production. The reports came in better than expected and the unusually weak April readings were revised upward.

Commercial REITs will be encouraged by economic strength

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Commercial REITs in the retail space, like Simon Property (SPG) and General Growth Properties (GGP), will certainly be happy with the the Fed being sanguine about inflation. Office REITs like Vornado Realty Trust (VNO) will be cheered by the industrial data, which shows manufacturing (and hiring) is improving.

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).

Implications for homebuilders

Homebuilders like PulteGroup (PHM) and D.R. Horton (DHI) focused on the housing starts and building permits data. While disappointing, starts and permits are heading in the right direction.


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