NEW YORK (TheStreet) -- Stocks of large-cap U.S. banks were hit hard on Wednesday, following the release of more disappointing housing market data.
The Census Bureau and the Department of Housing and Urban Development said housing starts in the United States during fell a seasonally adjusted annualized rate of 880,000. That's a 16% drop from December's annual pace of 1,048,000, and 2% below the pace of 898,000 in January 2013.
Economists polled by Thomson Reuters on average estimated the January rate for housing starts would come in at 950,000.
Those figures followed a similarly downbeat report on Tuesday from the National Association of Homebuilders. The NAHB/Wells Fargo National Housing Market Index fell to a preliminary reading of 46 for February from 56 in January. That was the biggest drop over the 30-year history of the index.
The NAHB attributed the February decline to severe weather, as well as shortages of labor and available building lots. "As shortages become more severe, builders are faced with the possibilities that they will not be able to build up their exceptionally low inventories in anticipation of the spring selling season," the NAHB said.
The Dow Jones Industrial Average (^DJI) was down 0.6%, while the S&P 500 (^GSPC) pulled back 0.7% and the NASDAQ Composite gave up 0.8%. The KBW Bank Index (I:BKX) was down 2% to 67.37, with all 24 component stocks ending with declines.
Big banks with stocks sliding more than 2.5% included Regions Financial (RF) of Birmingham, Ala., which closed at $10.10, and Zions Bancorporation (ZION) of Salt Lake City, closing at $30.12. Large-cap banks seeing shares decline by more than 2% included Citigroup (C); closing at $48.19; Morgan Stanley (MS), at $28.06; JPMorgan Chase (JPM), at $57.26; KeyCorp (KEY) of Cleveland, at $12.64 and PNC Financial Services Group (PNC) of Pittsburgh, which closed at $79.67.
FOMC Minutes Released
Also on Wednesday, the Federal Open Market Committee released the minutes of its Jan. 28-29 meeting, after which the committee reduced the Federal Reserve's "QE3" monthly bond purchases to a net pace of $65 billion per month, after reducing the pace at its December meeting to $75 billion. Before the December meeting, the Fed had been buying $85 billion a month in long-term U.S. Treasury bonds and agency mortgage-backed securities since September 2012, as part of an effort to hold-down long-term interest rates.
The build-up to the December meeting and reaction to the Fed's policy change helped push the market yield on 10-year U.S. Treasury bonds to roughly 3.04% at the end of 2013 from 1.70% at the end of April. This helped cause a major drop in mortgage refinance activity, which is expected to continue during 2014. The yield on the 10-year bond pulled back in January, before rising a bit this month, to 2.74% on Wednesday.
According to the FOMC minutes, committee members "generally noted that economic activity had strengthened more in the second half of 2013 than they had expected at the time of the December meeting," while making particular note of a rise in consumer spending and "a more solid uptrend" for business investment.
As always when discussing economic matters, there was an "on the other hand" argument placing a damper on optimism:
However, several participants observed that temporary factors had helped boost real GDP during the second half, pointing specifically to the substantial contributions from net exports and increased inventory investment. As a result, participants generally did not expect the recent pace of economic growth to be sustained, but they nonetheless anticipated that the economy would expand at a moderate pace in coming quarters.
The committee members generally agreed to continue tapering the Federal Reserve's bond purchases by $10 billion at each subsequent meeting, meaning the bond-buying is expected to end following the December 2014 meeting.
The media coverage of Federal Reserve Policy over the past year has focused on the tapering of bond purchases, but the central bank's main policy tool is the short-term federal funds rate, which has been locked in a historically low target range of zero to 0.25% since late 2008. FOMC guidance for quite some time has included a benchmark of 6.5% for the U.S. unemployment rate, but with the unemployment rate improving to 6.6% in January from 6.7% in December, committee members agreed that "it would soon be appropriate for the Committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed."
Most economists don't expect the federal funds rate to be raised until some time in 2015. But during the January FOMC meeting, "A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon," possibly before the middle of this year.
The FOMC did say in its past two statements that it would consider a range of economic indicators and not just the unemployment rate when considering whether or not to raise the federal funds rate. The eventual rise in short-term interest rates will bode well for most large-cap U.S. banks, which are continuing to see assets reprice at lower interest rates, thus squeezing their net interest margins.