Bank stocks advance on strong employment growth

Michael Nagle/Bloomberg

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

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

The index lost ground in 2023 amid concerns that high interest rates could hurt the economy, raise banks’ costs and hurt their loan books. But the strong labor market avoid serious trouble.

The Labor Department said employers expanded payrolls with a seasonal adjustment 272,000 jobs in May. The unemployment rate rose to 4% from 3.9% last month, but still remained near a 50-year low.

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

After two years of high interest rates, investors entered 2024 increasingly concerned about credit deterioration, but loan payments, while rising some across the industry, remain low by historical standards. Employment data indicated this could continue, supporting bank earnings as the year progresses.

“The US economy continues to be resilient,” said Henk Potts, market strategist at Barclays Private Bank. He expects the 4% unemployment rate to peak and remain “low by historical standards” until 2024.

According to Bureau of Economic Analysis. The Atlanta Federal Reserve predicted on Friday second quarter growth of 3.1%.

Investors have shifted their focus from worries 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 fight inflation, Fed officials have kept rates flat since July and continue to signal that their next move is a rate cut.

Fed officials said in statements this spring that weakness in the labor market could prompt a rate cut, but continued strong conditions would not automatically sound the alarm, given that inflation has fallen from a peak of 9% in 2022. to close to 3% this year. The Fed is targeting 2% and is more focused on inflation data than jobs at this stage.

The Fed “will of course take these numbers into account,” but the latest jobs data “is unlikely to shake policymakers from the course already charted,” said Sophie Lund-Yates, chief equity analyst at Hargreaves Lansdown.

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

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

Mark Fitzgibbon, head of research at Piper Sandler, said his firm’s latest analysis of domestic bank share buying showed an increase over the past six weeks. This at least partly reflects executives’ increased confidence in the outlook for their respective banks, he said.

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