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Bank stocks advance following robust employment gains

Bank stocks advance following robust employment gains

Bank stocks finished up last week after a strong jobs report supported expectations for ongoing economic strength.

Michael Nagle/Bloomberg

Bank investors dipped a toe into rally mode after Friday’s federal jobs report showed robust employment gains and continued economic vigor that bodes well for lenders’ credit quality.

The KBW Nasdaq Bank Index advanced less than 1% for the day on Friday but was up nearly 2% intraday. It was up 6% year-to-date through the first week of June.

The index lost ground in 2023 amid worries that spiking interest rates could cripple the economy, drive up banks’ costs and bruise their loan books. But the sturdy job market staved off serious troubles.

The Department of Labor said employers expanded payrolls by a seasonally adjusted 272,000 jobs in May. The unemployment rate ticked up to 4% from 3.9% the prior month but still held near a 50-year low.

Analysts said the favorable data reflect employer confidence in growth and continued economic strength in 2024 after a solid gross domestic product performance last year. A sturdy economy typically empowers borrowers to make loan payments, and banks, in turn, report low levels of credit losses.

After two years of high interest rates, investors entered 2024 increasingly concerned about credit deterioration, but loan charge-offs, while up some across the industry, remain low by historical standards. The employment data indicated that could continue, supporting bank earnings as the year progresses.

“The U.S. economy continues to be resilient,” said Henk Potts, market strategist at Barclays Private Bank. He expects the 4% jobless rate to mark a peak and that it will remain “low when compared to historical standards” through 2024.

GDP increased at an annual rate of 1.3% in the first quarter after advancing 3.4% in the final quarter of 2023, according to the Bureau of Economic Analysis. The Atlanta Federal Reserve on Friday projected second-quarter growth of 3.1%.

Investors have shifted their focus from concerns that a strong labor market would delay Fed policymakers’ decision to cut interest rates to the benefits of a strong economy for banks, analysts said. They noted that, after raising rates several times in 2022 and early last year to combat inflation, Fed officials have kept rates flat since July and continue to signal that their next move is a rate reduction.

Fed officials said in statements this spring that job market weakness might hasten rate cuts but continued strong conditions would not automatically sound alarms, given that inflation has dropped from a peak of 9% in 2022 to near 3% this year. The Fed is targeting 2% and is focused more on inflation data than jobs at this stage.

The Fed “will of course take these figures into account,” but the latest job data “are unlikely to shake policymakers off the course already charted,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

“Optimism remains in the market that two cuts could be on the way this year,” she added, and this could continue to provide bullish sentiment for bank stocks this summer.

Lower rates would drive down banks’ deposit costs and, at the same time, reduce borrowing costs. The latter could drive stronger loan demand that would bolster interest income for banks able to generate greater volume. Loan levels were flat in the first quarter, according to S&P Global Market Intelligence data.

Mark Fitzgibbon, head of research at Piper Sandler, said that his firm’s recent analysis of bank insider stock buying showed an increase over the past six weeks. This at least in part reflects executives’ increased confidence in outlooks for their respective banks, he said.

“We presume these insiders have uniquely well-informed insight into their respective company’s business prospects,” Fitzgibbon said.

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