At the end of the two-day FOMC meeting, the Federal Reserve signaled that it is done with interest rate hikes this cycle, with three rate cuts likely in 2024.
The development led the U.S. stock markets to touch new 2023 highs. All three indexes – the S&P 500, the Dow Jones Industrial Average and Nasdaq – closed almost 1.4% higher, with all the sectors ending the day in green.
Interest rate-sensitive sectors, including the Financial Services, were among the top performers yesterday. The major constituent of the sector, banks (highly sensitive to interest rates) soared. The SPDR S&P Regional Banking ETF, the KBW Regional Banking Index and the KBW Nasdaq Bank Index jumped 5.9%, 5.8% and 3.7%, respectively.
Bank stocks that had been laggards since the beginning of 2023 have been in the spotlight since last month. Yesterday, almost all bank stocks – big or small, including JPMorgan JPM, Bank of America BAC, Citizens Financial Group, Inc. CFG and Bank of Hawaii BOH – moved higher.
The Fed officials, through the latest dot-plot, indicated the rates will come down to 4.6% by the end of 2024, lower than 5.1% estimated in September. This seems to be driven by steadily cooling inflation numbers and robust U.S. economic growth.
Jerome Powell, the Fed Chairman, during a press conference following the decision, said “We believe that we are likely at or near the peak rate for this cycle. Participants didn't write down additional hikes that we believe are likely. So that's what we wrote down. But participants also didn't want to take the possibility of further hikes off the table. So that's really what we were thinking.”
Also, per the latest Summary of Economic Projections, stronger economic growth is expected for 2023. The U.S. economy is now anticipated to grow 2.6% this year, up from September’s 2.1% projection. Further, the labor market will likely continue to be resilient, with the officials estimating the unemployment rate to be 3.8% this year. For 2024, economic growth is expected to somewhat slow down to 1.4%, with the unemployment rate at 4.1%.
The Fed statement said, “The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” Hence, banks are likely to continue facing a tough operating backdrop in the next couple of quarters.
Since the eruption of the banking crisis in early March that led to the collapse of three large banks – Silicon Valley Bank, Signature Bank and First Republic Bank, industry players including JPM, BAC, BOH and CFG are facing unprecedented challenges of varying degrees. Concerns related to rising deposit costs and weakening credit quality (largely in commercial real estate) hurt banks’ financials.
Nevertheless, with the central bank indicating rate cuts next year, there’s a silver lining for banks. Though high rates will hurt industry players’ profitability to some extent, interest rate cuts along with several measures taken by banks (like diversifying revenue sources and balance sheet repositioning) are expected to provide much needed support.
At present, JPMorgan sports a Zacks Rank #1 (Strong Buy) and Bank of America, Citizens Financial and Bank of Hawaii carry a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
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