Bank Stocks Pull Back but End With Gains: Financial Winners

Updated from 2:59 p.m. ET with market close information.

NEW YORK ( TheStreet) -- State Street ( STT) was the winner among major U.S. financial names on Wednesday, with shares rising 1.5% to close at $69.67.

The broad ended mixed, pulling back from earlier gains that followed the release of the Federal Open Market Committee's statement on Federal Reserve monetary policy, which followed the conclusion of a two-day committee meeting. After initial euphoria over the FOMC's decision to make no changes in policy, investors seemed spooked at a small change in language from the previous statement:

"The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."

The main features of the Fed's policy to spur U.S. economic growth have been keeping the short-term federal funds rate in a range of zero to 0.25% since late 2008, and the central bank's long-term bond purchases, which have totaled $85 billion per month since September. The FOMC has said repeatedly, and again on Wednesday, that keeping the federal funds rate in the current "exceptionally low range" would be likely be appropriate at least as long as the U.S. unemployment rate remained above 6.5%. The June unemployment rate was 7.6% and the Labor Department will announce the July unemployment rate on Friday.

But investors have been anticipating a tapering of the Fed's bond-buying, sending the market yield for 10-year U.S. Treasury bonds to 2.58% Wednesday afternoon from 1.70% at the end of April. Comments from Federal Reserve chairman Ben Bernanke this month seemed to indicate the Fed might curtail bond purchases as early as September. The 10-year yield was as high as 2.609% earlier on Wednesday.

Despite investors apparent discomfort among the wording on inflation, the FOMC on Tuesday made no changes in policy, keeping the federal funds rate in its current range, and continuing the same level of bond-buying, while "maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction." This means the Federal Reserve's balance sheet will continue to expand, by a net $85 billion per month, from the securities purchases.

UBS economist Maury Harris early on Wednesday in a note to clients predicted that there would be "little change" in the FOMC statement, after members were "likely debating communications strategies" for eventual policy changes. "We still expect the Fed to announce at the September FOMC meeting that they will begin tapering the size of their monthly securities acquisitions," Harris wrote.

For money center banks and large regional banks, the upward move in long-term rates could help net interest margins over the long term. There was little evidence of much advantage to the banks from rising long-term rates during the second quarter. But what the banks really look forward to is a parallel rise in interest rates, which cannot take place until the Fed begins raising the federal funds rate.

The KBW Bank Index ( I:BKX) ended the session up 0.5%, closing at 66.77 and pulling back quite a bit from earlier gains. All but six of the 24 index components ended with gains.

Looking ahead to 2016, KBW analyst Christopher Mutascio in a report published late Tuesday estimated that Bank of America's ( BAC) earnings could rise to $1.95 a share, based on the "midpoint" of two scenarios for "normalized" earnings. Using this approach, KBW said that Bank of America and JPMorgan Chase ( JPM) were the cheapest stocks relative to 2016 earnings estimates, among 11 large-cap banks covered by the firm.

Other Economic News

Automated Data Processing early on Tuesday said the U.S. economy added 200,000 private-sector jobs during July, increasing slightly from 198,000 in June. The June figure was revised upward from 188,000. As usual, most of the job growth was in services, with 45,000 new positions categorized as trade/transportation services, while professional/business positions increased by 49,000. There were 22,000 construction jobs added during July, while manufacturing jobs declined by 5,000.

Second-Quarter GDP and Major Revisions

The Department of Commerce released its advance estimate for U.S. gross domestic product growth, which came in at an annual rate of 1.7% during the second quarter, which was much higher than the revised rate of 1.1% for the first quarter.

The Commerce Department in June had released its third estimate for first-quarter growth, which was much higher at 1.8%, but the department's Bureau of Economic Analysis in the meantime completed a "comprehensive revision" of GDP figures going back to 1929. The second estimate for second-quarter GDP growth will be released on Aug. 29.

"The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential investment that were partly offset by a negative contribution from federal government spending," the Commerce Department said in its press release.

The change in GDP calculation methodology included "the recognition of new forms of fixed investment." The changes led to a major revision of the "current dollar GDP" for 2012, increasing it by $559.9 billion. "$526.0 billion of this upward revision resulted from definitional changes," according to the Commerce Department.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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