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Why the FOMC minutes are the focus of the week in review

Brent Nyitray, CFA, MBA

Overview: Realist Real Estate Roundup, July 7–11 (Part 2 of 6)

(Continued from Part 1)

FOMC minutes are the focus of the week in review

The week after the jobs report is invariably data-light. Many individuals on Wall Street left town for the week in conjunction with the July 4 holiday weekend. The earnings season officially kicked of with Alcoa (or AA) announcing earnings. In other economic data, we got the NFIB Small Business Optimism iIndex, which showed that small business is still operating in a different world than the big S&P 500 multinationals. To read the NFIB Small Business Report, you would be surprised to think that the S&P 500 is at record highs.

The Federal Open Market Committee (or FOMC) minutes dominated the week, and there really weren’t any big surprises, although the Fed is beginning to contemplate ending the last piece of quantitative easing (or QE), which is the reinvestment portion. The Fed appears to be leaning toward ending QE this year. However, the Fed will still reinvest maturing securities back into the market until they start increasing interest rates. It’s clear that the Fed is concerned about the mechanics of monetary policy with such a huge balance sheet.

Commercial REITs will be encouraged by economic strength

Commercial real estate investment trusts (or REITs) in the retail space, like Simon Property (SPG) and General Growth Properties (GGP), will certainly be happy with the increase in the Bloomberg Consumer Comfort Index. Office REITs like Vornado Realty Trust (VNO) will be encouraged by the JOLT job openings report, which increased.

Implications for mortgage REITs

Mortgage REITs, like Annaly (or NLY) and American Capital (or AGNC), are driven by interest rates, which have been in a tight trading range. For them, it was all about the Federal Open Market Committee (or FOMC) minutes. The Fed was optimistic about economic growth in the second half of the year, but it looks like they aren’t about to increase the Fed funds rate any time soon.

Implications for homebuilders

Homebuilders, like PulteGroup (PHM) and D.R. Horton (DHI), focused on the FOMC minutes and the Job Openings and Labor Turnover (or JOLT) report. The builders will certainly take comfort in the Fed’s economic outlook for the rest of 2014. However, for the builders, 2014 is more or less in the books at this point because the fall and early winter are their seasonal slow time.

Continue to Part 3

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