Inversion Deepens • Fed Digs-In • Mixed Economic Data

• U.S. equity markets slipped Wednesday while the yield curve reached fresh extremes as investors parsed a mixed slate of economic data and Fed commentary suggesting that a recession may be necessary to cool inflation.
• Dipping back into negative territory on the week, the S&P 500 slipped 0.8% today while the tech-heavy Nasdaq 100 declined 1.4% and the Mid-Cap 400 and Small-Cap 600 were lower.
• Real estate equities were mostly lower today with the Equity REIT Index declining 0.9% with 16-of-18 property sectors in negative territory while the Mortgage REIT Index slipped 2.2%.
• Reflecting mounting recession fears combined with expectations that the Fed maintains a high tolerance for some "economic pain," the 10-2 Treasury Yield Curve spread widened to its most inverted level since 1982.
• A busy slate of economic data this morning painted a mixed picture of the state of the U.S. economy with strong retail sales data coming alongside a continued plunge in homebuilder sentiment and disappointing industrial production data.

Income Builder Daily Recap

U.S. equity markets slipped Wednesday while the yield curve reached fresh extremes as investors parsed a mixed slate of economic data and Fed commentary suggesting that a recession may be needed to cool inflation. Dipping back into negative territory on the week, the S&P 500 slipped 0.8% today while the tech-heavy Nasdaq 100 declined 1.4% and the Mid-Cap 400 and Small-Cap 600 were lower by over 1.5% each. Real estate equities were mostly lower today despite the downward pressure on long-term interest rates with the Equity REIT Index declining 0.9% with 16-of-18 property sectors in negative territory while the Mortgage REIT Index slipped 2.2%. Homebuilders declined 1% as another dip in Homebuilder Sentiment offset a strong slate of earnings results from the two largest home improvement retailers.

Fed officials pushed back on an imminent pivot today across a handful of public speeches, underscored by comments from San Francisco Fed President Mary Daly, meanwhile, stressed that a pause in rate hikes is still “off the table for now." The 10-Year Treasury Yield dipped 11 basis points to 3.69% today, reflecting mounting recession fears combined with expectations that the Fed maintains a high tolerance for some "economic pain," sending the 10-2 Treasury Yield Curve spread to its most inverted level since 1982. Crude Oil prices retreated on reports that the missile fired into Poland yesterday was likely fired by Ukraine, contradicting early reports of a Russian attack. Bitcoin, meanwhile, continued its decline as the fallout from the FTX implosion continue to rip across the broader cryptocurrency industry.

A busy slate of economic data this morning painted a mixed picture of the state of the U.S. economy with strong retail sales data coming alongside a continued plunge in homebuilder sentiment and disappointing industrial production data. The BLS reported that retail sales activity increased at its strongest pace in eight months in October, rising 1.3% on a month-over-month basis - well ahead of expectations of 1.0%. On a year-over-year basis, total retail sales were higher by 8.3% as strong spending at restaurants, grocery stores, and home improvement stores offset a decline in spending at department stores, sporting goods stores, and electronics stores.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Last Friday we published our REIT Earnings Recap: Rents Paid, Dividends Raised. Nearly 200 REITs and a dozen homebuilders have reported third-quarter earnings results over the past three weeks, providing critical information on the state of the U.S. real estate industry. REIT earnings season was surprisingly strong across nearly all property sectors. Of the REITs that provide guidance, nearly two-thirds raised their full-year FFO outlook alongside another two dozen dividend hikes. During third-quarter earnings season, the Equity REIT Index outperformed the broader S&P 500 by nearly 10 percentage points while Mortgage REITs outperformed by over 15 percentage points. Earnings results from Shopping Center, Industrial, and Net Lease REITs were most impressive - accounting for exactly half of the 58 guidance hikes. Residential and technology REIT results were more hit-and-miss - accounting for half of the 14 downward guidance revisions. Read the full report here.

Mortgage REIT Daily Recap

Today we published Mortgage REITs: High Yields Are Fine, For Now. Mortgage REITs - which were left for dead amid a historically brutal year across fixed-income markets - have rebounded in recent weeks as earnings results were not as catastrophic as feared. Mortgage REITs are now outperforming Equity REITs for the year, and we continue to see value in a modest allocation towards higher-quality mREITs in a balanced income-focused real estate portfolio. Despite paying average dividend yields in the mid-teens, the majority of mREITs were able to cover their dividends as improved earnings power from wider investment spreads offset book value declines, but we flagged a handful of mREITs with payout ratios above 100% of EPS.

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs finished lower today with residential mREITs slipping 1.8% while commercial mREITs declined by 1.9%. Broadmark Realty (BRMK) slumped more than 8% after reducing its monthly dividend by 50% to $0.35/share, representing a forward yield of 8.22%. BRMK was one of a handful of REITs that we flagged in the report as having a payout ratio above 100% and noted that the company hinted at a potential dividend reduction in their third-quarter earnings call. Upside leaders today, meanwhile, included NexPoint Real Estate (NREF), and Sachem Capital (SACH).

Economic Data This Week

The busy week of housing data continues on Thursday with Housing Starts and Building Permits data which is expected to show a further pull-back in home construction activity to levels below that of late 2019 before the pandemic boom. On Friday, Existing Home Sales data is also expected to dip to the lowest levels since 2014 excluding the pandemic shutdown months.

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