Financial stocks and sector-related exchange traded funds are finally having their moment in the limelight after Federal Reserve Chairwoman Janet Yellen hinted Friday of a greater chance for an interest rate hike.
On Monday, the Financial Select Sector SPDR (NYSEArca: XLF) rose 1.1%, Vanguard Financials ETF (NYSEArca: VFH) gained 1.1% and PowerShares KBW Bank Portfolio (NYSEArca: KBWB) increased 1.2%.
Banks and the financial sector strengthened on speculation that the Fed could act sometime this year. Yellen said the central bank was close to meeting its goals of maximum employment and stable prices and described consumer spending as “solid,” Reuters reports.
[related_stories]After Yellen’s Jackson Hole speech Friday, Fed Vice Chairman Stanley Fischer also suggested that the central bank could act as soon as next month, the Wall Street Journal reports.
“While the rate hike has not yet happened, markets have already begun to move and shift with the assumption of a hike,” Margaret Yang Yan, market analyst at CMC Markets Singapore, told USANews.
Looking at the fed-fund futures, options traders placed a 30% probability of a rate hike in September, compared to a 21% chance last Thursday. Meanwhile, the odds of a rate hike by the end of the year were close to 60%.
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Supporting bets for higher rates, a recent report revealed consumer spending activity increase for the fourth straight month in July.
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector.
SEE MORE: Bullish Signs for Bank ETFs
Financials have been underperforming this year as an extended low-rate environment weighed on the sector’s earnings outlook. For instance, XLF is only up 2.3% so far this year, compared to the S&P 500’s 7.7% gain.
For more information on the banking sector, visit our financial category.
Financial Select Sector SPDR