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Big Banks Hammered on Rate Fears: Financial Losers (Update 1)

Updated from with market close information.

NEW YORK ( TheStreet) -- Stocks of major U.S. banks took it on the chin Thursday, after another positive unemployment report stoked investors' fear of higher interest rates.

The Dow Jones Industrial Average ended the session with a 1.5% decline, while the S&P 500 (SPX.X) was down 1.4% and the NASDAQ Composite dropped 1.7%.

The Labor Department said that first-time unemployment claims for the week ended Aug. 10 totaled 320,000, which was the lowest level for weekly claims since late 2007. First-time jobless claims were down by 15,000 from the previous week. Economists polled by Thomson Reuters had on average expected last week's claims to come in at 335,000.

Investors are nervous about potential near-term and long-term changes in Federal Reserve monetary policy. The central bank's main policy tool is the short-term federal funds rate, which has remained in a range of zero to 0.25% since late 2008. The Federal Open Market Committee has repeatedly said this "highly accommodative" policy is likely to remain appropriate at least until the U.S. unemployment rate falls below 6.5%. The U.S. unemployment rate in July improved to 7.4% from 7.6% in June, indicating that there's still plenty of time left before the federal funds rate begins to climb.

The Federal Reserve as part of the "QE3" policy has been making monthly purchases of a net $40 billion in long-term agency mortgage-backed securities and $45 billion in long-term U.S. Treasury bonds since last September. Investors have been anticipating a curtailment of the Fed's balance sheet for several months, pushing the market yield on 10-year Treasury bonds up to 2.71% Wednesday from 1.7% at the end of April.

The 10-year yield jumped another six basis points to 2.78% Thursday afternoon.

The next FOMC will take place on Sept. 17-18, followed by a Federal Reserve policy announcement on the afternoon of Sept. 18.

Cisco (CSCO) also placed a drag on the entire market, with shares dropping over 7% to close at $24.49, after the announcement of a headcount reduction of 4,000, which CFO Frank Calderoni discussed with TheStreet's James Rogers.

Shares of retailers were mixed, with Wal-Mart Stores (WMT) reporting second-quarter earnings that missed the consensus estimate by a penny, although sales and earnings were up from a year earlier. Macy's (M) on Wednesday had reported earnings that came in shy of estimates, but were up 7% year over year. Still, the company lowered its 2013 earnings forecast.

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