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Why Did the Jobs Report Shock Investors Last Week?

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Jun. 6 2016, Updated 8:09 a.m. ET

Week in review

The shockingly weak jobs report on Friday dominated the week ending June 3. Non-farm payrolls only increased by 38,000. However, that number was depressed due to technical reasons from the Verizon strike. If you include the two-month revisions, job growth was negative in May. The number was the catalyst for a strong bond market rally that took the ten-year yield down 15 basis points for the week. Markets essentially wrote off the June Federal Open Market Committee meeting as far as interest rate hikes go. Now, investors turn their attention to the July and September meetings.

Aside from the jobs report, we had a weak construction spending report and strong home price appreciation in the Case-Shiller Home Price Index.

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Implications for mortgage REITs

Last week, bond yields fell to 1.7%. This is generally good news for mortgage-backed securities investors. However, weakness in the jobs report isn’t necessarily good for credit-exposed REITs like Redwood Trust (RWT).

A more dovish Fed is generally good news for agency REITs such as Annaly Capital Management (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 source 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 construction spending and Case-Shiller. Homebuilders still lack the confidence to really push out the volume. However, if that number stands, it could indicate that the lack of confidence could change. Meanwhile, pent-up demand continues to build. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).

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