Morning Report: Inflation remains nonexistent

Vital Statistics:

S&P futures392519.3
Oil (WTI)58.600.34
10 year government bond yield 1.14%
30 year fixed rate mortgage 2.85%

Stocks are up this morning on overseas strength. Bonds and MBS are up.

Inflation came in at 0.3% MOM and 1.4% YOY. Ex-food and energy, inflation was flat MOM and rose 1.4% YOY. These numbers were below Street expectations, and are well below the Fed’s inflation target. IMO, inflation certainly doesn’t feel nonexistent. Certainly not at the supermarket.

Mortgage applications decreased 4.1% last week as purchases declined 3% and refis fell 5%. “Mortgage rates have increased in four of the first six weeks of 2021, with jumbo rates being the only loan type that saw a decline last week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite some weekly volatility, Treasury rates have been driven higher by expectations of faster economic growth as the COVID-19 vaccine rollout continues. With the 30-year fixed rate increasing to 2.96 percent – a high not seen since last November – refinances declined, and their share of total applications dipped to the lowest level in three months. Government refinance applications did buck the trend and increase, and overall activity was still 46 percent higher than a year ago. Demand for refinances is still very strong this winter.”

PennyMac reported full year earnings of $20.92 for 2020. With the stock trading at $62 bucks a share, this works out to be a P/E ratio of three. For the year, the company originated almost $200 billion. PennyMac is expected to earn $16.67 next year, which puts the multiple under 4. One of the knocks on mortgage bankers is that they never seem to obtain a multiple, and we are currently seeing that now.

Speaking of multiples, New Rez mentioned the disappointing mortgage banking multiple issue on its earnings call. The company filed a confidential S-1 with the SEC last year which contemplated doing something with the lending arm. New Rez was asked about the spin on the conference call, and it seemed that they might be having second thoughts:

So we are — without getting too specific, we continue to evaluate what a total separation would mean to the company, meaning NRZ or — and NewRez. So if we think that it will create more value for shareholders by separating the company and bringing it into the public markets. It’s something that’s absolutely on the table. As you’ve seen from some of the recent either attempts or IPOs that have come out with some of our friends and peers on the mortgage company side, some of them have gone OK, others have not gone as well.

Loan Depot is supposed to list this week as well, and they have pulled the IPO before. The market seems to think mortgage bankers are worth single-digit multiples, and it doesn’t matter whether the business model is wholesale, consumer direct, or aggregator. I suspect this won’t be good for potential M&A. I can’t see many founders who worked for years to build a mortgage company being willing to sell out for 3 times earnings.

There were 6.6 million job openings in December according to the JOLTS jobs report. The number of hires fell by 400k to 5.5 million. The losses were mainly in hospitality, entertainment, and transportation. Retail did increase, but that was probably temporary hiring for the holiday season. The quits rate came in at 2.3%, which was unchanged.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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