Bank stocks dive as weak jobs report boosts bets on Fed rate cuts

U.S. bank stocks were trading in a sea of red in Friday afternoon trading as an unexpectedly weak jobs report prompted traders to price in more aggressive interest-rate cuts by the Federal Reserve.

Overall, the Financial Select Sector SPDR Fund (NYSEARCA:XLF) dipped 2.3% and the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) slid 3.7%. The risk-off tone went beyond financials, with the major U.S. stock indexes tumbling amid concerns that the economy is heading for a hard landing.

Big banks: Citigroup (NYSE:C) -6.5%, Bank of America (NYSE:BAC) -4.1%, JPMorgan Chase (NYSE:JPM) -4.1%, Wells Fargo (NYSE:WFC) -5.6%, Goldman Sachs (NYSE:GS) -5.3%, Morgan Stanley (NYSE:MS) -5.2%.

Regional banks: U.S. Bancorp (NYSE:USB) -2.4%, New York Community Bancorp (NYSE:NYCB) -2.1%, KeyCorp (NYSE:KEY) -4.3%, Fifth Third Bancorp (NASDAQ:FITB) -3.4%, Comerica (NYSE:CMA) -2.2%, Citizens Financial Group (NYSE:CFG) -3.4%, Zions Bancorporation (NASDAQ:ZION) -4.7%.

Custodian banks: Bank of New York Mellon (NYSE:BK) -2%, State Street (NYSE:STT) -3.3%, Northern Trust (NASDAQ:NTRS) -2.4%.

The swings come after nonfarm payrolls added markedly fewer jobs in July than what economists had expected, and job growth was revised lower in the previous two months. The report also featured another rise in the unemployment rate and further easing in wage growth. Fed Chair Jerome Powell said Wednesday that if the economy develops as the central bankers expect, a rate cut could be on the table as soon as September.

The surprisingly weak report led fed funds futures traders to increase their expectations that the central bank will cut rates three times this year, and that policymakers will start the easing cycle with a 50-basis-point reduction in September, rather than a 25-bp move.

The prospect of lower rates have both positive and negative implications for lenders, though it really comes down to whether the bank’s balance sheet is asset-sensitive.

On the positive front, a decline in rates generally stimulates borrowing by consumers and businesses. Such increased loan activity can lead to higher profits for banks, as they earn more from interest on these loans.

But lower rates also can narrow the spread between what banks pay on deposits and the rates they earn on loans (i.e., net interest margin), potentially squeezing banks’ profitability. Also, banks often hold large amounts of fixed-income securities that yield lower returns when rates are cut.