Week in review
The equity sell-off continued last week. Economic data didn’t help either. Personal incomes rose, but personal spending didn’t. Construction spending disappointed as well. The ISM Manufacturing Index reflected the carnage in the energy sector and the impact of the strong dollar.
Bad news for Fed doves
Investors who are looking for reasons for the Fed to abandon its tightening bias were disappointed last week. The jobs report showed wage inflation accelerating. Productivity or unit labor costs were disappointing as well. Higher wages combined with lower top line growth for the economy spell reduced profit margins going forward. Stocks reacted to that.
Implications for mortgage REITs
Bond yields fell by about 8 basis points last week. Strategists have been generally taking down their forecasts for 2016 rate hikes on the weakness. You could see the weakness in the drop in the two-year rate. We’ll have to see if there’s some follow-through from the jobs report. American Capital Agency (AGNC) reported numbers last week. It was able to maintain its dividend. The best comp for American Capital Agency is Annaly (NLY). Non-agency REITs like Two Harbors (TWO) are more sensitive to economic strength and weakness. They bear credit risk and might be a better option during a tightening cycle.
Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT). If you’re interested in trading in the mortgage REIT sector through an ETF, you can look at the iShares Mortgage Real Estate Capped ETF (REM).
Implications for homebuilders
Homebuilders like PulteGroup (PHM) and CalAtlantic Group (CAA) were disappointed by the construction spending report. It was a big miss. We did hear from Pulte last week. Its numbers were generally good. This is good news for builders that focus on the first-time homebuyer like D.R. Horton (DHI) and PulteGroup. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).