The news that nearly 200,000 new jobs were created in June buoyed markets on Friday, but it led to another massacre in the mortgage REIT sector. Fears of an early tapering of the Federal Reserve's QE3 program showed agency-paper buyers Annaly Capital (NLY 0.52%) and American Capital Agency (AGNC 0.65%) closing down more than 5%, while Armour Residential (ARR 0.82%) racked up a stunning loss of nearly 8.25%.
While any good economic news is to be welcomed, I think the overall response to this particular employment report was overblown. Here are three reasons the numbers don't add up to a surging economy -- nor herald a speed-up of a QE3 taper, the biggest concern in the mREIT sector right now.
1. The important numbers haven't changed
The 195,000 new jobs topped the estimates of 165,000, so it's easy to see why there was such an emotional response to the jobs report. Digging deeper, however, shows that the news is not quite as good as it first appears.
The report notes that the unemployment rate is still 7.6%, and the number of unemployed individuals remains at 11.8 million, which has been the case since February. In addition, those unemployed for more than six months also stood firm, at 4.3 million.
This doesn't sound like a "solid report" that will prompt the Fed to begin tapering its bond and securities purchases in September, as a Barclay's analyst opined. Since Fed Chief Ben Bernanke said plainly that tapering would start only if the economy cooperates, I don't see how unemployment numbers that haven't budged in at least five months could be considered the impetus for the Fed to commence its withdrawal of economic support.
2. Full-time employment still eludes many
The type of jobs being filled surely matters to the Fed, since underemployment is generally not considered the benchmark of an economy well on its way to robust health. This report showed that many who want full-time jobs simply aren't finding them.
Those who were working part-time but wanted full-time employment increased their numbers by 322,000 from May to June. The number of discouraged workers, who believe no job exists for them, stands at 1 million, an increase of more than 200,000 from one year ago.
3. Hiring was slack in important sectors
While hiring was decent for areas such as leisure and hospitality, retail, and health care, sectors such as manufacturing and construction stayed flat. To me, the latter two areas seem more important to an overall economic rebound than leisure and hospitality, which may be spiking upwards merely because of the summer vacation season.
For retail, the increase in jobs could be more a side effect of Obamacare, according to The Wall Street Journal, which notes that the requirement for employer-supplied health insurance kicks in at the 30-hour-per-week mark for employers with 50 or more employees. If retail entities are scaling down their workweeks to avoid the cost of health insurance -- the article points out that the average workweek in that sector has decreased 0.2 hours from last year -- these companies may be offering more jobs overall to make sure all shifts are covered.
Postponing the inevitable?
None of these three factors bode well for the economy as a whole, unfortunately. However, the tepid employment news should have the effect of slowing the decline of mREITs as investors realize that the immediate danger has passed, and that a QE3 slowdown is not set to begin immediately.
This week, the Fed will release the minutes from its June meeting, which may cause some market jitters as investors anticipate more detail on the Fed's plans. That the taper will come to pass is certain, and the markets knew that. Although the latest jobs report will only postpone the inevitable, perhaps it will give investors time to consider and digest that inescapable fact -- and to realize that it won't bring about the end of the mREIT sector.
