XLRE: Hedge Solution To Non Farm-Payroll Rpt ?
Like the run up to PCE inflation report release, US market has similarly jittery since Tue, 04 Jun 2024.
With the US Non Farm payroll (NFP) out on Fri, 07 Jun 2024, things finally took a “plunge”.
When US market closed on Friday:
DJIA: -0.22% (-87.18 to 38,798.99).
S&P 500: -0.11% (-5.97 to 5,346.99). Still at all time high level.
Nasdaq: -0.23% (-39.99 to 17,133.13). Still at all time high level.
Jobs Reports - Summary.
This week has been all about - Jobs, jobs and jobs. (see above)
The 4 anticipated reports were (a) JOLTs, (b) ADP employment, (c) US weekly jobless claims and (d) Non-Farm payroll finally.
US JOLTs for April 2024.
(a) Jobs Openings & Labour Turnover survey (JOLTs).
On Tue, 04 Jun 2024, government data showed that job openings fell in April 2024. (see above)
Opening were 8.059 million jobs available, vs market forecast of 8.3 million.
Compared to March’s data (8.355 million)
Incidentally it is the lowest level since February 2021.
This comes about as the labour market shows further signs of rebalancing.
Logically speaking a “weaker” JOLTs data is welcoming news to the Fed and US market (maybe). [Strong]
This is because of its implications about US Inflation:
Lower wage pressures: Fewer open positions might lead to slower wage growth, that is a key driver of inflation. This could be positive for the Fed’s efforts to control inflation.
Reduced demand: If companies are hiring less, it could signal weaker consumer demand, potentially leading to lower prices in some sectors.
Perhaps US market is waiting for the one, two jab cross (boxing) before rejoicing?
The first jab is the JOLTs report.
The second being Friday’s May Non-Farm payroll (NFP) report, the data highlight of the week.
In between the first and second jabs, will be minor punches.
Interestingly, there are differences between the 2 reports. (see above)
It is important to know what each job report implication is, when looking at the data.
(b) ADP Employment Report.
On Wed, 05 Jun 2024, the ADP employment report for May 2024 was released.
It showed an increase in private sector jobs, but at a slower pace of -19.15% when compared to April 2024’s of 188,000.
Headline figure was 152,000 new jobs, lower than analysts’ forecast (173,000) expectations and April's numbers. [Strong]
Suggesting the job market might be cooling down slightly. [Strong]
Overall, the report indicates a solid but moderating labor market.
US Weekly Jobless Claims.
On 06 Jun 2024, US weekly jobless claims for week ending 01 Jun 2024, painted a slightly different picture of the US labor market compared to the JOLTs and ADP reports from earlier in the week.
Jobless Claims Rise: Initial claims for unemployment benefits rose to 229,000, exceeding expectations (220,000 claims) by 9,000 claims or +4.09%, possibly indicating a potential increase in layoffs. (see below)
With more people filing for unemployment benefits, it signals a softening in the labour market, complemented by earlier 2 reports of diminishing job creation from ADP and JOLTs.
US Non Farm Payroll (NFP).
This is the report that broke the bow I supposed.
The first 3 reports out (last week) all pointed to a moderatingly “weaker” labour force. [Strong]
Something that the Fed is looking out for, something that shows waning demand and implies cooling inflation.
All hopes flew out of the window the moment the NFP data hit the street. (see above)
US economy added far more jobs than expected in May, countering fears of a slowdown in the labour market and likely reducing the Federal Reserve’s impetus to lower interest rates.
Nonfarm payrolls expanded by 272,000 for May 2024.
This is up a massive +64.85% from April’s 165,000 jobs and well ahead by +43.16%% based on Dow Jones consensus estimate of 190,000.
Hopes that come in all shapes and sizes were dashed.
CME FedWatch Tool
Above is CME FedWatch tool reaction - before and after NFP report was released.
In my previous post where I have shared — a 47% probability of a September interest rate cut has surfaced (click here ! to read).
This probability has just increased to 55.3%, after the first 3 jobs reports were out. (see above)
By Friday, the probability of a September interest cut has fallen by -8.7% to 46.6%.
US Market for Jun 10-14?
US market indexes futures for week of Jun 10-14 is not looking up.
There is anticipation that market will continue to trend downwards overall for the week.
Of course, there will be exceptions for some stocks eg. $Apple(AAPL)$ and $NVIDIA Corp(NVDA)$
Investors will need a bit of time to recalibrate before deciding on the action course.
Time to bet on Housing?
Given the “surprise” curve ball served by the US Non Farm Payroll report, really is it time to start look at Housing sector and position ourselves in-advanced?
Can we afford to be blindsided again?
If and when the Fed trims interest rate, it will be the start of a chain of cuts.
With real estate being super interest sensitive, it is likely that this sector will see a resurgence in demand.
And as the Fed continues to trim the fed funds rate, it will further fuel this sector’s appeal.
Rates from Freddie Mac
Mortgage rates are showing signs of easing, falling below the 7% for the first time in a month. (see above)
Before the NFP report was out, both the 30-year and 15-year terms were 6.94% and 6.24% respectively.
After the NFP report, there was a slight uptick of +0.05 to both rates. Boo hoo hoo !
As noted, when rates continue their downward trajectory, more buyers will come into the marketplace.
If there ever is a good time to start monitoring and accumulating, “at the right” moment is just about “right” ?
$Real Estate Select Sector SPDR Fund(XLRE)$
As I am unfamiliar with what to look out for when it comes to housing sector, buying into a housing fund would be the most sensible approach.
The SPDR real estate select is composed of companies primarily involved in the following industries: Real Estate Management & Development and REITs, excluding Mortgage REITS.
In total, there are 31 companies in the Real Estate Select Sector SPDR.
Above is a snapshot of its Top 10 holdings.
Why XLRE Funds?
Below are some reasons on why XLRE Funds?
Diversification: XLRE provides exposure to a diversified portfolio of real estate assets, including real estate investment trusts (REITs). By investing in XLRE, you can diversify your investment beyond individual properties.
Income Potential: REITs often distribute a significant portion of their income as dividends. XLRE’s holdings include various types of real estate, such as commercial, residential, and industrial properties. These income-generating assets can provide a steady stream of dividends.
Inflation Hedge: Real estate tends to perform well during inflationary periods. As prices rise, property values and rental income may increase, benefiting XLRE investors.
Low Correlation: Real estate has a low correlation with other asset classes like stocks and bonds. Adding XLRE to your portfolio can enhance diversification and potentially reduce overall risk.
Liquidity: Unlike direct real estate investments, which can be illiquid, XLRE is traded on stock exchanges. You can buy or sell shares easily, providing liquidity when needed.
*when it comes to investing your hard-earned money, remember to do your due diligence as every individual has varying risk tolerance.
Why XLRE? To which I would prompt “Why Not” based on investment mantra of do not put all eggs in one basket.
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