Speculation about earlier-than-expected interest rate hike had dented investor sentiment before the conference at Jackson Hole, Wyoming. Different views of the Fed members in the FOMC meeting regarding the rate hike intensified concerns.
However, the US Federal Reserve Chairwoman Janet Yellen’s speech at Jackson Hole indicated that the rate hike is not possible immediately. This helped investors to shift focus to those instruments that benefit from a low-rate environment.
She said that rate hike may come once the labor market progresses better than expected and inflation shoots up. However, though Yellen acknowledged some progress in the labor market, she also commented: “It speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover.”
On rate hike, Yellen said: “Of course, if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate.”
The Jackson Hole speech boosted markets the following trading session. The S&P ended above the 2K mark for the first time on Tuesday.
What is Holding the Fed Back?
In recent times, the major economic indicators showed decent improvement. Among others, the second-quarter GDP number, inflation rate and durable orders advanced. So what’s holding Fed to issue a confirmed timing of rate hike?
In July, the unemployment rate was 6.2%, declining almost 4% since 2009. But Yellen had earlier mentioned that broader labor market indicators are also crucial.
Over a considerable time, wage growth remained almost stagnant and has lagged the inflation rate. On the other hand, low-wage jobs were one of the major contributors to the overall job growth. The demand will be pulled back if the wage growth continues to fall behind inflation rate. Subsequently, inflation rate will struggle to achieve Fed’s target.
Behind the Headlines: Unemployment Components Still Dismal
Moreover, other components of the unemployment rate such as long-term unemployed, labor force participation rate and employment-population ratio also experienced unfavorable trend. The number of long-term unemployed that accounts for almost 33% of the total unemployed work force has remained almost flat in July at 3.2 million.
The labor force participation rate also remained flat at 62.9% since April. The employment-population ratio has increased only 0.3% over 12 months to reach 59% in July.
Separately, the number of part-time job holders is significantly high in the economy. This indicates either their working hours have been curtailed or they are finding it difficult to get a full-time job. The record low interest rates have also kept the older generation employed, affecting the job opportunities for the younger generation. These data indicate that the job market is still to recover as mentioned by Yellen at Jackson Hole.
The Fed will thus be more patient at least for some time regarding rate hike. Markets speculate that that the hike may come in around second quarter of 2015 as the Fed is expected to complete their bond purchasing program in October.
REITs & Low Interest
In this scenario, investments are likely to shoot up to take advantage of the prevailing low interest rate environment. Real estate investment trust (:REIT) companies, especially those which heavily depend on mortgage loans, benefit from a low-rate environment.
According to Inside Mortgage Finance, non-banking companies have provided greater share of the mortgage loans in the first half. The share of the non-banking lenders increased to 23% in the first half of 2014 from the year-ago level of 17%.
3 Mortgage REITs to Buy Now
Apollo Commercial Real Estate Finance, Inc. (ARI) is a provider of services related to commercial first mortgage loans, commercial mortgage-backed securities (CMBS) and other domestic real estate debt securities. This Zacks Rank #1 (Strong Buy) REIT also provides financial advices to real estate companies.
This mortgage REIT has current year EPS growth estimate of 23.9% and a strong P/E ratio of 10.1. The Zacks Consensus Estimate for the current year has been revised almost 8.5% up over the last two months.
Altisource Portfolio Solutions S.A. (ASPS) is engaged in providing services regarding real estate and mortgage portfolio management. The Zacks Rank #2 (Buy) REIT specializes in technology and knowledge oriented services.
This REIT has strong EPS growth estimate of 60.5% (for the current year?) and an impressive P/E ratio of 11.5. The Zacks Consensus Estimate for the current year has been revised 5.6% up over the last two months.
New Residential Investment Corp. (NRZ) is involved in real estate related operations. The company focuses on mortgage backed securities, residential mortgage loans and other related securities. The company holds a Zacks Rank #2 (Buy).
This company has solid EPS growth estimate of 43.1% (for the current year?) and a PE ratio of 8.6. The Zacks Consensus Estimate for the current year has been revised about 9% up over the last two months.
These top-ranked mortgage REITs have strong growth prospect and are looking to gain from this low interest rate environment. Moreover, the increase in share of non-banking lenders in mortgage loans volume will help these companies to expand further.