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Week in Review: Retail Sales Disappoint

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Week in review

Last week brought us some important economic data including retail sales and industrial data. The industrial data came in better than expected, but manufacturers are experiencing a slowdown, undoubtedly driven by the strong dollar.

September retail sales rose 0.1% on the headline number, but the control group, which strips out some of the more volatile elements, fell 0.1%. Market observers (and many retailers) who had hoped that lower gasoline prices would drive spending on other goods have been disappointed.

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Inflation remains tough to find, as the producer price index fell 0.5% last month. The consumer price index came in a little higher than expected. However, with inflation remaining muted, the government announced last week that Social Security recipients would receive no cost-of-living adjustments this year.

The labor market indicators were strong again, as last week’s report of initial jobless claims fell to 255,000—the lowest reading since 1973. When you take into account population growth, that is truly a remarkable number. Job openings dipped slightly from record levels, as the JOLTS data fell to 5.4 million.

Implications for mortgage REITs

Bond yields fell 6 basis points last week. Overall, it appears that bond market volatility is decreasing. 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 mortgage-backed securities (MBS) 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 likely 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 labor data, but manufacturing data were weak. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).

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