Unemployment Rate Was Steady at 5% in April
Why Was the April Jobs Report Disappointing?
Highlights from the survey
In April 2016, the unemployment rate was steady at 5% or about 7.9 million people. The underemployment rate fell to 9.7% from 9.8%. The labor force participation rate fell to 52.8%.
The underemployment rate includes discouraged workers or people who want to work but stopped 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 called “involuntary part-time employees”—fell to 6.0 million people from 6.1 million. Businesses seem to be holding on to temporary workers and offering them full-time jobs.
Influence on the Fed’s policy
The Fed has a dual mandate to maximize employment consistent with price stability. While the health of the labor market is partially indicated by the unemployment rate, it isn’t the only indicator that matters. In fact, the Fed had been using an unemployment target to guide its policy, but then it backed off as the target rate approached. The Fed found itself in an awkward position. The rule suggested that it should raise rates, but the economy wasn’t ready to handle higher rates.
The Fed’s language has shifted toward a more comprehensive view of the labor market. Investors interested in making directional bets on interest rates can look at the iShares Barclays 20+ Year Treasury Bond ETF (TLT).
Implications for mortgage REITs
Changing unemployment is a double-edged sword for REITs. Some REITs, particularly non-agency REITs, bear credit risk. When the economy improves, it’s good news for them. Others, such as agency REITs, primarily bear interest rate risk. They’re 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. It’s influenced heavily by the federal funds rate.
On the other hand, non-agency mortgage REITs such as Two Harbors Investment (TWO) tend to use less leverage, so they’re less affected than others. Real estate companies such as Colony Financial (CLNY) are impacted the most by improving credit. Investors interested in broad exposure to the mortgage REIT sector might want to look at the iShares Mortgage Real Estate ETF (REM).
Next, let’s take a look at the labor force participation rate.
Browse this series on Market Realist:
