The Fed Tightened Its Range for Its 2016 GDP Forecast
Bonds Barely React to the December 2015 FOMC Minutes
The Fed’s adjusted 2016 growth estimates
During the December FOMC meeting, the Fed raised its estimates for 2016 GDP ( gross domestic product ) growth from a range of 2.2%–2.6% to a range of 2.3%–2.5%. The central tendency ticked up from 2.3% to 2.4%. However, the reason for the upgrade was largely due to the recently passed budget that bumped up government spending from sequestration levels.
Notwithstanding the revision in December, the Fed has been consistently high on its GDP growth estimates since the Great Recession.
According to the December FOMC minutes, the Fed members noted that the strong dollar has had negative impacts on exporters and commodity-based firms. Outside of these sectors, business activity was considered “solid.” The automotive sector continues to be a bright spot as easy credit and a long-delayed upgrade cycle are making 2015 the best year since 2000.
They also mentioned that housing has continued to recover gradually. Housing has been a disappointment for the simple facts that prices continue to rise and inventory remains tight, yet builders are still very cautious in spite of sky-high builder sentiment numbers. If there is one sector that could take the economy to the next level, it’s housing. Housing employs a lot of people and, therefore, has a very high economic multiplier.
The consumer seems to be spending a little more as evidenced by a rise in light vehicle sales, and household net worth numbers are bolstered by the rally in stock and real estate prices.
Implications for mortgage REITs
Mortgage REITs are affected differently by economic strength. Agency REITs like Annaly Capital Management (NLY) and American Capital Agency (AGNC) tend to react negatively to strength because it telegraphs higher rates. Investors can trade that via the iShares 20+ Year Treasury Bond ETF (TLT).
REITs that focus on mortgage origination such as PennyMac Mortgage Investment Trust (PMT) welcome strength, as it helps increase origination activity. Non-agency REITs such as Two Harbors Investment (TWO) benefit from a more benign credit environment. Investors interested in trading the mortgage REIT sector via an ETF can consider the iShares Mortgage Real Estate Capped ETF (REM). Conversely, they can trade the financial sector via the S&P SPDR Financial ETF (XLF).
Browse this series on Market Realist: