Unemployment Fell from 5.1% to 5% in October
Blowout Jobs Report Brings a December Rate Hike into Focus
Highlights from the survey
In October, the unemployment rate fell from 5.1% to 5.0%, or about 7.9 million people. The underemployment rate fell from 10.0% to 9.8%, and the labor force participation rate held steady at 62.4%. The underemployment rate includes discouraged workers, or people who want to work but have given up looking. It also includes people marginally attached to the labor force and people employed part-time who want to work full-time.
The number of people employed part-time for economic reasons (also referred to as involuntary part-time employees) fell again from 6 million to 5.7 million. This is further evidence of tightening in the labor market.
Influence on Fed policy
The Fed has a dual mandate: to maximize employment consistent with price stability. While the health of the labor market is partially described by the unemployment rate, that isn’t the only indicator that matters.
In fact, the Fed had been using an unemployment target to guide policy but backed off as we approached that target rate. The Fed found itself in a position in which the rule suggested it raise rates, but the economy was nowhere near ready to handle higher rates. The Fed’s language has shifted to a more holistic view of the labor market. Investors interested in making directional bets on interest rates can look at the iShares Barclays 20+ Year Treasury Bond Fund (TLT).
Implications for mortgage REITs
Changing unemployment is a double-edged sword for REITs. Some REITs, such as non-agency REITs, bear credit risk, and an improving economy is good news for them. Others, such as agency REITs, primarily bear interest-rate risk, and they are vulnerable to a hawkish Fed.
Levered agency mortgage REITs such as Annaly Capital Management (NLY), MFA Financial (MFA), and American Capital Agency (AGNC) are probably the most sensitive to short-term interest rates. The repurchase agreements they use to finance their balance sheets are fixed to LIBOR ( Intercontinental Exchange London Interbank Offered Rate), which is heavily influenced by the federal funds rate.
Non-agency mortgage REITs such as Two Harbors Investment Corp. (TWO) tend to use less leverage, so they are less affected than the others. Real estate companies such as Colony Capital (CLNY) are affected most by improving credit. Investors interested in broad exposure to the mortgage REIT sector can look at the iShares Mortgage Real Estate ETF (REM).
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