QQQ - Jobs Market Cools In October Rate Cuts On The Horizon XLRE A Buy

2023-11-03 09:30:51 ET

Summary

• The October jobs report showed weaker-than-expected nonfarm payrolls and private payrolls, with a rise in the unemployment rate.
• Average hourly earnings growth continues to decline, reaching a new cycle low.
• US 10yr yield falls after dovish data, impacting the real estate sector and making the XLRE ETF an attractive buy.

The October jobs report revealed a 150k climb in nonfarm payrolls versus the +180k expectations, the 34th straight month of employment gains. The two previous months were revised lower by 101k – also bear in mind that there were about 33k of UAW strike job losses and perhaps another 10k from the Hollywood writers' strike. Private payrolls rose just 99k, under the +145k consensus.

The unemployment rate ticked higher to 3.9% compared to the 3.8% forecast – the highest since last January. It was at 3.7% a year ago. As for average hourly earnings, they were up 0.2% - the weakest since February 2022. On a year-over-year basis, hourly earnings were up 4.1% - a new cycle low, and the softest since June 2021 (a year ago, it was at +4.9%). The average workweek, meanwhile, was 34.3, lower from 34.4 in September, indicating a slightly softer jobs market. The labor force participation rate ticked down to 62.7% from 62.8%.

The household survey, used to determine the unemployment rate, showed a high 348k November labor market contraction.

U.S. Labor Market Turns Softer In October

Rates (US10Y) moved lower in response to the mixed report, plunging under 4.55% after being near 4.9% earlier this week. The 2yr yield (US2Y) fell 4.88%, its lowest level since Labor Day.

A sanguine Treasury refunding report, weak October ISM

The manufacturing report, very strong unit productivity, and jobs market data that indicates a loosening of the employment picture all help the Fed’s case to bypass another rate hike. The swaps market now prices in the first rate cut happening in June 2024.

Equity futures rose after being about unchanged in the premarket and the US Dollar Index (DXY) turned sharply lower, flirting with key support at the 105 level. The labor market clearly turned weaker in November given not just the modest headline payrolls rise, but also the soft average hourly earnings and lighter workweek numbers. Gold, meanwhile, rallied back above $2000 per ounce ( XAUUSD:CUR) amid lower real interest rates.

Unemployment Rate Rising, Monthly Jobs Gains Turning Tepid

October Jobs Report Breakdown

U.S. Average Hourly Earnings Growth Continues to Decline

Dollar Drops Post-NFP, Hanging at Critical Support

US 10yr Yield Falls Hard After Dovish Data To Start November

Following this morning’s dovish jobs report, all eyes remain on where Treasury yields will go from here. Among the sectors most impacted by high volatility in the rates market is Real Estate. I have a buy rating on The Real Estate Select Sector SPDR Fund ETF (XLRE).

According to the issuer , XLRE seeks to provide an effective representation of the real estate sector of the S&P 500 Index (SP500) by investing in companies from real estate management and development and real estate investment trusts, or REITs, excluding mortgage REITs. The exchange-traded fund ("ETF") allows investors to take strategic or tactical positions at a more targeted level than traditional style-based investing.

XLRE is a moderate-sized ETF with $4.1 billion in assets under management and it pays a high 3.9% trailing 12-month dividend yield . Share-price momentum is weak, though the fund has bounced hard as yields have eased. With a very low 0.1% annual expense ratio , it is an efficient portfolio, but holding XLRE in a tax-sheltered account may be ideal given the high payout rate. Risk is high given this year’s volatility and XLRE’s bear market while liquidity is robust given the fund’s low three-basis-point 30-day median bid/ask spread.

The small niche of the S&P 500 has been re-rated lower over the past several quarters. According to FactSet , its 5-year average forward operating earnings multiple is 19.4, the area XLRE tracks trades at just a 14.8 P/E (as of October 28, 2023).

Real Estate Re-Rated Lower

The 4-star rated fund by Morningstar illustrates something investors must consider. There is a high amount of exposure to the mid-cap space. More than half of the allocation, per the Morningstar Style Box, is away from large caps. Moreover, there is relatively little in the way of growth with XLRE. So, expect the fund to differ significantly from the (SPX).

XLRE: Portfolio & Factor Profiles

XLRE: Portfolio & Dividends

The Technical Take

I went long term on this view of XLRE. Notice in the chart below that shares have done very little over the past decade. About unchanged on a price-only basis since 2016, I see support in the low to mid-$30s. The ETF broke under its late 2020 and Q4 2022 low of $33 in October this year, but XLRE has zoomed higher in the last several days in what could be a bullish false breakdown pattern.

But also take a look at the long-term weekly moving averages. The 40-week moving average (comparable to the 200-day moving average) is decidedly negatively sloped while the 200-week moving average is beginning to inflect down. These are bearish signs, and with a high amount of volume by price in the $31 to $41 zone, rally attempts from here could make tough sledding for the bulls. Finally, the weekly RSI at the top of the graph shows that the momentum oscillator is stuck in the notoriously bearish 20 to 60 zone.

Overall, the chart is not all that encouraging, but the bulls can point to a possible bullish false breakdown which could lead to a strong year-end and short-covering rally.

XLRE: Shares Briefly Breach Key Support

The Bottom Line

I have a buy rating on The Real Estate Select Sector SPDR Fund ETF. I see the valuation reset has been healthy for long-term returns. The chart and momentum situations are not ideal, but long-term support is in play.

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