Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Daily Recap: Dovish Cut | Stocks And REITs Rally | GDP Beats

Responding to what investors interpreted as a "dovish cut" by the US Federal Reserve, the S&P 500 ETF (SPY) rallied to new record-highs, gaining 0.3% on the day while the Nasdaq ETF (QQQ) climbed 0.5%. As expected, the Fed cut short-term rates by 25 basis points and signaled a pause in future action. Stocks and bonds rallied in the subsequent press conference as the 10-Year Treasury Yield (IEF) ticked lower by 4 basis points, closing at 1.80% 

Investors keyed in on a key comment from Fed Chair Powell: "We'll really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.” Broad-based inflation has been almost non-existent over the five years outside of rising housing costs. Core CPI ex-Shelter has averaged roughly 1% since the start of 2012. Real estate equities were generally higher on the day as investors gear up for another busy afternoon of earnings. The broad-based REIT ETF (VNQ) ended the day higher by 0.4%, led to the upside by the shopping center, office, and apartment REIT sectors while the storage and mall REIT sectors lagged. 

The Hoya Capital Housing Index, the benchmark that tracks the performance of the US housing industry, finished the day flat as strength from the home improvement retailers Home Depot (HD) and Lowe's (LOW) was offset by softness in the mortgage lenders and real estate technology and brokerage sector. Apartment REIT UDR (UDR) delivered a solid day after boosting same-store NOI guidance while single-family rental REIT Invitation Homes (INVH) finished mildly lower despite reporting very strong blended rent growth of 4.6%. 

This morning, homebuilder Taylor Morrison (TMHC) this morning reported that net orders surged 39% from last year, but gave back some of this year's as net margins missed estimates on higher SG&A. Notable in this morning's GDP data, as we'll discuss in more detail below, was that residential fixed investment produced a positive contribution to GDP growth for the first time in six quarters, consistent with the noted reacceleration in new home construction. Homebuilder MDC Holdings (MDC) and apartment REIT Mid-America (MAA) report earnings after the bell today.

Yesterday afternoon. Data Center REIT stalwart Digital Realty (DLR) announced a deal to acquire European data center operator Interxion (INXN) in an $8.4B deal which will significantly expand DLR's global data center platform. Also yesterday afternoon, mall REITs Pennsylvania REIT (PEI) and Taubman (TCO) each reported disappointing earnings with downward revisions to same-store NOI growth. 

For the commercial real estate industry, the busiest week of earnings season continues, highlighted by reports this afternoon from retail REITs Regency (REG), Tanger (SKT) and Urban Edge (UE) as well as data center REIT CyrusOne (CONE) in addition to the housing REITs mentioned above. We'll have full coverage of earnings season on the iREIT on Alpha Marketplace.

After delivering its best year since 2005 last year, the US economy has downshifted in 2019 on a slowdown in the goods-producing industrial and manufacturing sectors, linked to sputtering growth in major European and Asian economies. The annualized rate of real GDP grew by 1.9% from last quarter, beating consensus estimates of 1.6%, but matching the second-slowest quarterly rate of growth since 2015.

Signs of life emerged in the latest GDP report, however, as stronger-than-expected consumer spending and an uptick in residential fixed investment provided reasons for optimism into the end of 2019. The closely-watched final domestic demand figure rose by 2.0% from last quarter, while personal spending jumped a solid 2.9%. Inflationary pressures remain muted with core PCE prices rising 2.2% in the third quarter.

While consumer spending was strong in Q2, business spending and fixed investment continue to cool after an acceleration in 2018. Recent economic growth has been even more impressive considering the negligible impact of residential and nonresidential fixed investment in structures. Growth in residential fixed investment had been a drag on GDP growth for six consecutive quarters, but turned positive this past quarter, consistent with the reacceleration in single-family homebuilding that we've covered extensively in the Rentonomics series.

Fixed investment in non-residential structures, however, continues to be a drag on total GDP Growth, subtracting 0.5% from the quarterly figure. For context, these two categories combined boosted GDP by 1.3% at the peak in 2002 and dragged down GDP growth by 1.1% at the bottom in 2008. A tailwind for REITs and real estate asset owners, supply growth has cooled even as demand remains solid.

As discussed in our Weekly Outlook, the "data dump" of economic data continues tomorrow with PCE inflation data, and then on Friday, we'll get a look at the nonfarm payrolls report for October. Throughout the week, we'll hear from more than 140 S&P 500 companies in the busiest week of earnings reports this quarter.

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