U.S. bank stocks rose on Friday after a Labor Department report revealed continuing strength in the U.S. economy, reducing expectations that the Federal Reserve will need to cut official interest rates sharply to maintain momentum.
JPMorgan Chase (JPM) - Get Report rose 0.2% in New York trading, while the Wall Street firm Morgan Stanley (MS) - Get Report climbed 0.5% and and Wells Fargo (WFC) - Get Report gained 0.3%. The gains came even as the Standard & Poor's 500 Index slid 0.9%.
Bank stocks on average had fallen about 4% over the past month as speculation mounted that a slowing economy would prompt the Fed to cut interest rates to maintain the current expansion, already the longest in U.S. history at more than a decade old.
Yet the Labor Department on Friday reported that the economy created 224,000 new jobs in June, triple the rate in May and far exceeding economists' forecast for an increase of 160,000 jobs.
Chris Gaffen, president of world markets at TIAA Bank, said in e-mailed comments that the strong jobs report could reduce pressure on the Fed to move aggressively.
Trading in futures contracts on Federal Reserve funds implies a near-certainty among investors that the central bank will cut rates by at least 0.25 percentage point at their next meeting, scheduled for July 30-31. Yet some investors had expected an even deeper reduction, with a 27% chance of a 0.5 percentage-point cut.
"The strong June payroll number took the possibility of a 0.5 percentage-point cut off the table," Gaffney wrote in e-mailed comments. "There is definitely less urgency for the Fed now that May's poor jobs report was shown to be a blip and not a trend."
Lower interest rates tend to reduce banks' lending profits, since they typically have to charge less for loans while maintaining deposit payouts.
U.S. jobs growth has averaged about 195,000 per month during President Donald Trump's presidency, slightly above the 193,000 average during 2016, which was Barack Obama's last full year in office.
Trump has extended the current economic expansion, which started following the 2008 financial crisis and ensuing recession, by pushing through a $1.5 trillion tax-cut package in late 2017 and rolling back regulations on banks and other industries.
Yet Trump's trade war with China has rattled investors, who worry that retaliatory tariffs could stymie oversees sales by big U.S. exporters such as bulldozer-maker Caterpillar (CAT) - Get Report while driving up costs for retailers like Walmart (WMT) - Get Report that rely heavily on Chinese imports. According to a recent slew of economic reports, the uncertainty caused by the trade war has also prompted many businesses to delay or cancel planned investments in factories, equipment, technology and personnel.
Economists surveyed by the data provider FactSet estimate that U.S. gross domestic product -- the broadest gauge of activity -- will expand by 2.5% this year, representing a slowdown from 2018's pace of 2.9%.
Such growth has fallen shy of the predictions of Trump and other administration officials, including Treasury Secretary Steven Mnuchin, who had argued in 2017 that the tax cuts would spur annual long-term growth of 3% or higher.
In recent months, Trump has repeatedly called for the Fed to cut rates steeply, writing in a June 24 tweet that the Federal Reserve "doesn't know what it is doing." Last month the president told Fox Business Network that he "made" Powell by appointing him to lead the Federal Reserve in early 2018, but that the central bank's leader "doesn't do anything for us."
The president argues that the U.S. economy could be expanding at a 5% rate if interest rates were lower.
Powell, for his part, has said in press conferences and interviews that the Fed, by its Congressional mandate, is independent of political pressure. Yet he and colleagues have signaled a willingness recently to cut rates or even take the drastic step of printing more money to prevent the U.S. from slipping into recession.
Even so, the strength of Trump's economy, despite falling short of the administration's predictions, appears strong enough -- at least based on the latest data -- to avoid the need for steep rate cuts, according to Oliver Blackbourn, a portfolio manager at the $357 billion money manager Janus Henderson (JHG) - Get Report .
In e-mailed comments following the jobs report on Friday, Blackbourn wrote that investors "all but price out the probability of a double interest rate cut from the Federal Reserve in July."
"Recession risks may start to look overpriced," Blackbourn wrote. "We have been through this a couple of times in this cycle already, and each time the U.S. consumer, which forms the backbone of the economy, has held up."
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