Jobs Report Hits post-2001 High, but We’re Not Seeing Inflation



Slow news week

The week after the jobs report is invariably data-light, and since we’re between earnings seasons, there wasn’t much to move markets. The most important events were the JOLTs job openings, which continue to flash economic strength. The index came in just shy of 5 million job openings, which is the highest we’ve seen since 2001. The labor market continues to put up strong numbers, but wage growth is nowhere to be found.

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The second important data point was the Producer Price Index, which measures inflation at the wholesale level. The PPI is a leading indicator for inflation at the retail level, which is where consumers begin to feel it. The index came in at -0.5%, which was the fourth negative reading in a row. Falling energy prices have been driving the PPI lower. However, oil and natural gas were generally flat in February, which means energy prices aren’t the whole explanation.

Wall Street will be interested to see if the Fed takes down its inflation forecast materially in its FOMC projection materials. Note that the Fed prefers to use personal consumption expenditures to measure inflation, not the consumer price index or the producer price index.

Implications for mortgage REITs

Bonds got hammered on the jobs report, which was bad news for mortgage REITs—particularly agency REITs like Annaly Capital (NLY) and American Capital Agency (AGNC). Non-agency REITs like Two Harbors (TWO) fared a little better since they take credit risk, which a stronger economy helps.

Investors interested in trading the mortgage REIT sector via an ETF should look at the iShares Mortgage Real Estate Fund (REM). Investors interested in making directional bets on interest rates should look at the iShares 20 year bond fund (TLT).


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