Week in review
Last week, which ended May 6, 2016, was dominated by the jobs report on Friday. It was weaker than expected. The payroll growth was a measly 160,000. Unemployment was flat and the labor force participation rate retreated.
We had a slew of important economic data last week aside from the jobs report including construction spending, the Insititute for Supply Management reports, productivity, and labor costs. Overall, the economic data disappointed last week. Strategists are starting to worry that we’re getting close to a recession.
Implications for mortgage REITs
Last week, bond yields fell to 1.8%. Strategists have been taking down their forecasts for rate hikes in 2016 based on economic weakness and the latest dot-plot from the Fed. Federal funds futures contracts aren’t expected to move until 2018.
A more dovish Fed is generally good news for agency REITs such as Annaly Capital (NLY) and American Capital Agency (AGNC). Rate increases impact the REIT sector mainly by increasing the cost of funds. Recently, the FHLB (Federal Home Loan Bank) tightened its eligibility requirements. REITs that have been using the FHLB will lose access to a particularly cheap cost of capital.
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 such as PulteGroup (PHM) and CalAtlantic Group (CAA) were focused mainly on disappointing new home sales data. Builders still lack the confidence to really push out the volume. Meanwhile, pent-up demand continues to build. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).
Next, let’s see why bond yields fell last week and why the Federal Open Market Committee’s statement is being interpreted as dovish.