The stronger payrolls number added to speculation of a September Federal Reserve rate hike, lifting bank stocks and sector related exchange traded funds.
While the broader equities market was stuck in sideways trading, financial stocks were hitting highs. For instance, on Friday, the iShares U.S. Regional Banks ETF (NYSEArca: IAT) rose 1.6%, SPDR S&P Bank ETF (NYSEArca: KBE) advanced 1.6%, PowerShares KBW Bank Portfolio (NYSEArca: KBWB) increased 1.6% and SPDR S&P Regional Banking ETF (NYSEArca: KRE) returned 1.8%. All four ETFs also hit fresh 52-week highs Friday.
Bolstering the outlook for bank stocks, the strong May employment numbers fueled speculation that the Fed would hike rates this year in response to the improving economic outlook. [Look to Bank ETFs in a Rising Rate Environment]
The government announced 280,000 new jobs created in May, compared to expectations of about 225,000, and the unemployment rate was at 5.5%, reports Amey Stone for Barron’s. Additionally, average hourly earnings was up 0.3% in May, compared to expectations of 0.2%.
“For the Fed this is encouraging news and will help to mitigate concerns about the slowdown in Q1,” RBS Securities economist Michelle Girard said in the Barron’s article. “However, they will no doubt like to see more evidence suggesting growth is firmly back on an uptrend before beginning to hike rates. Thus, we remain comfortable with our call for the first rate hike in September.”
Moreover, some banks are standing out in the sector. For instance, Bank of America (NYSE: BAC) could benefit from further cost cutting.
“BofA has cut expenses a lot over the past five years, especially legacy-asset-servicing expenses, which it plans to halve from 1Q15 level to $500 mil per qtr,” JPMorgan’s Vivek Juneja said, according to Barron’s. “If BofA cuts legacy-asset-servicing expenses further to $250 mil, it would add $0.06 to annual EPS and about 100bp to efficiency ratio.”
Goldman Sachs (NYSE: GS) is also expected to generate greater return on equity, compared to its peers, as industries continue to consolidate.
“GS’ opportunities to benefit from continued strength in M&A activities, potential to see greater client activity levels as rates rise, and GS’ greater expense flexibility suggest it will maintain a healthy ROE advantage to its peers,” Wells Fargo’s Matthew Burnell and Jason Harbes said.
BAC and GS make up large components of broader financial sector ETFs. For instance, the Financial Select Sector SPDR (NYSEArca: XLF) includes 5.8% BAC and 2.8% GS.
For more information on the financial sector, visit our financial category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.