Bank stocks extend decline as CPI data reduce chances of jumbo Fed rate cut
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Gary Yeowell
U.S. banks saw their shares retreat in Wednesday midday trading, adding to Tuesday’s slump, as traders ramped up bets that the Federal Reserve will cut interest rates by only 25 basis points next week following a hotter-than-expected consumer price read for August.
At the time of writing, the SPDR S&P Bank ETF (NYSEARCA:KBE) dipped 2.3%, the Invesco KBW Bank ETF (NASDAQ:KBWB) slid 2%, and the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) drifted down 2.6%. The broader financials sector, too, saw selling pressure along with the wider stock market.
Megabanks: Citigroup (NYSE:C) -2.1%, Bank of America (NYSE:BAC) -2.3%, JPMorgan Chase (NYSE:JPM) -0.7%, Wells Fargo (NYSE:WFC) -2.2%, Goldman Sachs (NYSE:GS) -0.7%, Morgan Stanley (NYSE:MS) -1.2%.
Custodial banks: Bank of New York Mellon (NYSE:BK) -0.8%, State Street (NYSE:STT) -2.6%, Northern Trust (NASDAQ:NTRS) -2.6%.
Regional lenders: U.S. Bancorp (NYSE:USB) -2.2%, PNC Financial (NYSE:PNC) -2.6%, New York Community Bancorp (NYSE:NYCB) -1.1%, KeyCorp (NYSE:KEY) -1.5%, Bank Ozk (NASDAQ:OZK) -2.7%, M&T Bank (NYSE:MTB) -2.6%, Western Alliance Bancorporation (NYSE:WAL) -2.5%, First Horizon (NYSE:FHN) -3.2%.
The bearish price action comes as the modest upside surprise in August core CPI, mainly driven by higher prices for housing and travel, spurred traders to price out the chances of a jumbo half-point rate cut by the Fed. Instead, they find themselves mostly in the quarter-point camp.
“The Fed is weighing the stickiness of service price inflation on the one hand against the softening of the job market on the other hand,” said Comerica Chief Economist Bill Adams. “The tradeoff makes them more likely to cut rates by a quarter percent at next week’s decision than make a larger half-percent cut.”
Generally, when the Fed hikes rates, banks’ net interest income rises. The opposite is true when the Fed swings to easing policy. But such dynamics should be taken with a grain of salt, as they depend on several factors, such as a lenders’ relative asset sensitivity.
Evercore ISI last month screened banks that are likely to fare better when the Fed starts cutting. Jefferies recently contended that rate reductions may have a greater negative impact on big banks due to their higher asset sensitivity, unlike the regionals which are more neutral to short-term, policy-sensitive rates.