ADP’s payroll numbers predict a good jobs report, affecting REITs

Market Realist

The ADP National Employment Report is a monthly preview of the Labor Department’s Jobs Report

Automatic Data Processing (or ADP) is a global provider of business outsourcing. It provides a range of services, from human resources to payroll. The “ADP National Employment Report” is published monthly by the ADP Research Institute. It provides a snapshot of the current non-farm private sector payroll data based on actual transactional payroll data. ADP collaborates with Moody’s (MCO) to predict the Bureau of Labor Statistics payroll numbers.

Interestingly, the ADP employment report provides a very tight correlation with the BLS’s revised payroll numbers. The BLS revises its payroll data twice, and the ADP number comes out before the first estimate. The BLS’s first estimate is based on roughly 70% of the establishments sampled. The second revision includes another 20%, and the final revision adds another 4%. Since ADP’s numbers are based on live payroll data, they’re more accurate than the BLS’s first pass at the numbers.

The ADP payroll data corresponds with the BLS’s private non-farm job numbers. The non-farm payroll number will include public-sector jobs. We need to subtract these in order to make an apples-to-apples comparison with the ADP report.

Highlights of the report

Private-sector employment increased by 281,000 in June. May’s number was 179,000. In terms of industries, professional and business services increased the most, by 53,000, while financial employment increased by a small amount.

Services increased 230,000, while goods-producing companies added 51,000. Construction added 36,000 jobs. Small businesses accounted for 117,000 of the increase, while medium and large businesses contributed 115,000 and 49,000, respectively. Overall, the report shows that the job market continues to expand—and could be accelerating. But you should keep in mind that one point doesn’t constitute a trend.

Implications for mortgage REITs

Mortgage REITs like American Capital (AGNC), Annaly (NLY), Hatteras (HTS), and Capstead (CMO) have been at the mercy of the bond market sell-off that began last spring. For them, it’s all about the end of quantitative easing (or QE). The current increasing interest rates environment and a strengthening economy benefit non-agency REITs like Two Harbors (TWO) the most.

Rising interest rates lower the value of fixed-income assets, especially mortgage-backed securities. When rates rise, REITs take capital losses on their portfolios. Because they use leverage—in other words, they fund their portfolios through borrowed money—any changes in asset prices have an outsized effect on their equity. If the payroll numbers on Friday come in better than expected, a further sell-off in bonds can raise interest rates further as investors bet on recovery and the end of quantitative easing. This would be negative for REITs. Investors who want to take directional bets on interest rates should look at the iShares 20-year Treasury ETF (TLT).

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