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Week in Review—The Jobs Report Disappoints

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Week in review

Last week had a slew of important economic data, but the jobs report was the highlight of the week. The jobs report was a disappointment on pretty much every level. One of the few positive points was that unemployment didn’t rise. Payroll growth was paltry, and the August number (which many expected to see revised upward) was revised downward.

In other data, we saw personal income and personal spending come in more or less as expected. Construction spending increased 0.7%, which was a positive data point. However, the ISM Manufacturing Index fell to almost 50, which is neutral. The big rally in the US dollar is clearly having an impact on the manufacturing sector.

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Implications for mortgage REITs

Bond yields collapsed on the jobs report, although it seems like some of the volatility in the bond market is beginning to dissipate. This is good news for mortgage REITs, particularly agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC), which are exposed to rate volatility. REITs exposed to adjustable-rate mortgages, such as MFA Financial (MFA), are a little more insulated from interest rate moves, as the coupon rates on their MBSs also adjust with interest rates.

Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT). Those interested in trading in the mortgage REIT sector through an ETF can 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 being 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 were encouraged by the Case-Shiller data showing home price appreciation and the good numbers for residential construction. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).

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