Bank stocks and sector-related exchange traded funds led market gains Friday after the Labor Department reported robust job creation in July, adding to speculation that the Federal Reserve may have room to hike interest rates later this year.
Among the top performing ETFs of Friday, the SPDR S&P Bank ETF (NYSEArca: KBE) rose 3.1%, SPDR S&P Regional Banking ETF (NYSEArca: KRE) gained 3.3%, iShares U.S. Regional Banks ETF (NYSEArca: IAT) increased 3.0% and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) advanced 3.2%.
Meanwhile, the broad Financial Select Sector SPDR (NYSEArca: XLF), which includes a 33.5% tilt toward the bank sub-sector, was up 1.7% on Friday. It only took eight months, but the financial sector is finally in the black this year, with XLF up 0.6% year-to-date.
Supporting the rally in financials Friday, the Labor Department revealed employers added 255,000 jobs in July, reports David Harrison for the Wall Street Journal. The average hourly earnings ticked up by 0.3% month-over-month and up 2.6% year-over-year. The labor-force participation rate also rose to 62.8% from 62.7%.[related_stories]
All-in-all, the uplifting data signal the economy is not at risk of cutting jobs any time soon and suggest the weak May report was an anomaly. Moreover, it seems employers have shaken off concerns of a post-Brexit environment.
Consequently, with the economy chugging along, the Federal Reserve may be back on track to raising interest rates this year, which would help support margins on bank loans.
“The July jobs report certainly increases the odds of a September tightening, but I’d still keep them somewhat below 50 percent,” Dean Maki, chief economist at Point72 Asset Management LP and a former Fed staffer, told Bloomberg.
With a steepening yield curve, or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long. Yields on 10-year Treasury notes rose 7 basis points to 1.573% on Friday.
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SPDR S&P Regional Banking ETF