Last Week’s Productivity and Unit Labor Costs Disappoint



Week in review

Last week had some important industrial data, with industrial production and manufacturing production. Both numbers were better than expected. Capacity utilization improved. However, the prior month was revised downward in a big way.

Consumer sentiment fell, which is unusual, given that these consumer sentiment indices tend to be the inverse of gasoline price indices. In other words, as gasoline prices fall, sentiment improves. That hasn’t been happening lately, even though energy prices have fallen considerably.

Weak commodity prices reflected in the producer price index, which showed that inflation is nowhere to be found. Unit labor costs increased while productivity disappointed. There were big revisions in Q1, however.

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Implications for mortgage REITs

Bond yields rose about 3 basis points last week on the weak economic data. This was good news for mortgage REITs, particularly agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC). REITs exposed to adjustable-rate mortgages, such as MFA Financial (MFA), are a little more insulated from interest rate moves. Investors interested in making directional bets on interest rates should look at the iShares 20-year bond fund (TLT).

Investors interested in trading in the mortgage REIT sector through an ETF should look at the iShares Mortgage Real Estate Capped ETF (REM).

For mortgage REIT investors, the markets will turn inhospitable as the Fed begins the normalization process. That said, taking credit risk through non-agency REITs will probably be the best strategy in an environment of rising yields driven by economic strength.

Implications for homebuilders

Homebuilders are concerned mainly about the job market. The productivity and unit labor cost numbers were disappointing. Unit labor costs are rising while wages are largely stagnant on a real basis. This isn’t necessarily good news for a sector that requires wage growth and plentiful jobs, especially for the first-time homebuyer. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).


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