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Banking industry

U.S. Bank Stocks Rally as Economists Predict Accelerated Interest Rate Hikes

Strategic Insights

— 2 min read

The Federal Reserve's timetable for raising interest rates appears to be accelerating, as economists predicted a stronger-than-expected January jobs report would usher in a new era of sustained job growth. As a result, the KBW Bank Index surged on Friday, with all 24 lenders rising by the end of the day. Regions Financial Corp. led the pack with a 5 percent jump, followed closely by Bank of America Corp.'s 4.4 percent gain. This uptick in bank stocks is significant, as it marks the first time in six years that interest rates have set new lows, causing lending margins to crimp for banks. However, sustained job growth is expected to help assure Fed policy makers that the economy can withstand an increase in interest rates this year.

Key Takeaways:

  • The KBW Bank Index rose on Friday, with all 24 lenders experiencing gains, driven by a stronger-than-expected January jobs report.
  • Regions Financial Corp. and Bank of America Corp. led the gains, rising 5 percent and 4.4 percent, respectively.
  • The Federal Reserve's decision to raise interest rates is expected to be the biggest story for banks this year, with analysts speculating on the timing of the hike.
  • Gerard Cassidy, an analyst at RBC Capital Markets, stated that rising short-term interest rates are essential for the bank recovery from the crisis.
  • Analysts are bracing for the impact of higher interest rates on lending margins, with some predicting a 5 to 6 percent cut in average earnings estimates if rates remain unchanged.
  • The 257,000 advance in payrolls in January, followed by a 329,000 gain in December, indicates sustained job growth, which is expected to help assure the Fed that the economy can withstand an increase in interest rates.
  • Drew Matus, deputy U.S. chief economist for UBS Group AG, warned clients that the Federal Open Market Committee's meeting on June 17th will be a crucial day for investors.
  • The payrolls data also boosted shares of insurers, such as Prudential Financial Inc., which rose as much as 4.5 percent, the biggest intraday advance since December.
  • Rick McKenney, chief financial officer of Unum Group, highlighted the ongoing pressures caused by the interest-rate environment on their investment portfolios.

Statistics:

  • January job growth: 257,000 jobs created
  • December job growth: 329,000 jobs created (revised from previous reports)
  • KBW Bank Index: all 24 lenders experienced gains on Friday
  • Regions Financial Corp.: 5 percent gain
  • Bank of America Corp.: 4.4 percent gain
  • Prudential Financial Inc.: 4.5 percent gain (intraday high)
  • Unum Group: 3.6 percent gain (intraday high)

Sources:

  • Bloomberg
  • Labor Department
  • UBS Group AG
  • RBC Capital Markets
  • Prudential Financial Inc.
  • Unum Group
  • Federal Reserve

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