Yes, it’s a compass. I must be more vague next time, you’re too good at guessing :-)
It is a fairly expensive item, requiring iron, copper and a diamond (to hold the pointer). Compass does not show north/south direction (this is already obvious from the location of sun/moon), but rather it shows direction to spawn position, which presumably is your home.
New spawning system is almost finished, I only need to add special case for flying creatures so that they will spawn anywhere, even if they have been eradicated.