The U.S. equity markets closed lower on Friday mainly led by a fall in financial stocks. More importantly, the 24-company KBW Bank Index declined 2.3% primarily due to the disappointing May jobs report.
The major bank stocks that declined on Friday include Bank of America Corporation BAC , Citigroup Inc. C , Wells Fargo & Company WFC , JPMorgan Chase & Co. JPM , Regions Financial Corporation RF , BB&T Corporation BBT , KeyCorp. KEY and M&T Bank Corporation MTB . These stocks fell in the range of 1.5-3.5%.
Wondering what's the connection between the jobs report and the plunge in banking stock prices?
Before understanding the connection, let's see how disappointing the May jobs report was. Per the Bureau of Labor Statistics, the U.S. companies added a mere 38,000 nonfarm payrolls in May, way below the market expectation of 160,000 and the lowest since Sep 2010.
The weak jobs report has created doubts over the stability of the U.S. economy and raised concerns about the interest rate hike by the Federal Reserve later this month.
Banks are largely dependent on interest income and rising rate environment in beneficial for them. The Fed hiked interest rates in Dec 2015 for the first time in nearly a decade, but has since then been reluctant to increase the same owing to concerns over slowdown in global growth and significant market volatility.
So last month, when Fed officials signaled a rate hike in the FOMC meeting to be held on Jun 14-15, investors had cheered the news and banking stocks had surged. But dismal May jobs report has turned the tide and the probability of increase in rates this month has diminished.
Moreover, following the release of jobs report, the Fed governor Lael Brainard in a speech in Washington said, "…there are tentative signs of slowing in the labor market and risks remain. We cannot take the resilience of our recovery for granted."
Therefore, as the concerns rose about the timing of the next increase in interest rates, banking stocks were the hardest hit.
Now all eyes are on the Fed Chair, Janet Yellen who in an event in Philadelphia later today is expected to shed some insight on the Fed's stance on the rate hike. However, all is not lost for banking stocks. The chances of rate hike in July or September are still bright, unless economic data indicates an overall slowdown.
So it's wait and watch for the investors as well as the banks. Until there is some certainty about the next rise in interest rates, investor sentiment for the banking stocks is expected to remain bearish.
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