Banks Climb as Data Quiet Talk of Fed Tapering: Financial Winners

NEW YORK ( TheStreet) -- Stocks of large U.S. banks showed strength on Friday as disappointing economic reports shed light on the quandary facing the Federal Open Market Committee when it decides whether or not to curb the Federal Reserve's "QE3" bond purchases next week.

The KBW Bank Index ( I:BKX) rose slightly to close at 63.68, with , with 15 out of 24 index components ending with gains.

Big banks seeing shares rise nearly 1% included JPMorgan Chase ( JPM), with shares closing at $52.59, as investors shrugged off a Wall Street Journal report that the bank would add 5,000 employees to handle regulatory compliance and risk-management problems, and that related expenses and provisions for litigation reserves would total $4 billion during the second half of 2013.

Other large banks seeing shares rise nearly 1% included U.S. Bancorp ( USB) of Minneapolis, with shares closing at $37.14 and Huntington Bancshares ( HBAN) of Columbus, Ohio, at $8.52.

The Commerce Department on Friday estimated that U.S. retail sales during August grew by 0.2% from July and 4.7% from August 2012. The month-over-month growth rate was down from an upwardly revised 0.4% in July. Economists polled by Thomson Reuters had estimated August sales would show a sequential increase of 0.4%.

The Reuters/University of Michigan consumer sentiment reading for September was 76.8, which was the lowest level since April. Economists surveyed by Thomson Reuters were expecting a reading of 82.

Pulling Back on QE3

As part of its third round of quantitative easing the Federal Reserve has been making monthly purchases of $40 billion in long-term mortgage-backed securities and $45 billion in long-term U.S. Treasury bonds since September of last year, in an attempt to hold long-term rates down.

The FOMC at its next meeting September 17-18 is expected by many economists to begin a modest reduction of the central bank's monthly bond purchases, in light of comments by committee members over the past few months. The market has pushed the yield on 10-year U.S. Treasury bonds up to 2.89% from 1.70% at the end of April. The yield on the 10-year did decline by two basis points on Friday, mirroring the stock market's reaction to the disappointing economic reports.

Former Labor Secretary Robert Reich in an interview on TheStreet said the Fed should hold off on tapering bond purchases. "I would wait until the economy was pretty safe," Reich said, with "two quarters of economic growth over 3%, unemployment down, under 7% for at least two quarters, hopefully about 6.5% or 6.2%," followed by the publication of the Fed's plan for ending QE3.

Jim Cramer said in an interview on that the decline in mortgage loan application was "horrendous," and that "maybe tapering is off the table, or a small taper," since "people feel that rates have peaked," which may have "obviated the need for the Fed to do anything at all."

Former Wells Fargo Chairman and CEO Richard Kovacevich in an interview Friday on CNBC said that since the Fed has signaled a tapering of bond purchases "it would be shocking to the market if they do not taper." He added that the amount of tapering is "not relevant," and then said "I don't think QE3 is working, so I would definitely do a $20 billion reduction in bond purchases, but if you don't like $20 billion do $10 billion." He also suggested that the Fed curb purchases of Treasury bonds and not mortgage-backed securities, because "that's the least valuable."

Adding fuel to the Federal Reserve fire, Japan's Nikkei newspaper on Friday said President Obama was close to nominating former Treasury secretary Lawrence Summers as the next Federal Reserve chairman, to succeed Ben Bernanke. There have been many reports suggesting the president would nominate Janet Yellen to be the next Fed chair, since she is already a member of the FOMC, is the Vice Chairwoman of the Board of Governors of the Federal Reserve System, is known to have similar views to Bernanke, and is considered a less controversial choice than Summers.

But Newedge director of market strategy Robbert van Batenburg in a report on Monday wrote that "in the perverse logic that is so prevalent in DC these days, Summers might actually be easier to get through the Committee than Yellen."

"While some Democrats have an aversion to Summers, their party allegiance would make it unlikely for any of them to deliberately block Obama's choice by putting a hold on the former Treasury Secretary," he wrote, adding "Republicans may actually prefer Summers over Yellen given their antipathy for the Fed's unrestrained Quantitative Easing, of which Yellen is a much bigger proponent than Summers."

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-- 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 TheStreet.com 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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