Inflation in focus as bank investors mull Fed’s next move

November’s labor market recovery alone did not deter another interest rate cut this week – good news for lenders – but bank investors nonetheless put the brakes on after the latest federal report on lending. employment, preferring to wait for Wednesday’s inflation data.

The KBW Nasdaq Bank Index remained flat Friday after the Labor Department said the U.S. labor market rebounded last month. The index eased on Monday and traded in a narrow range on Tuesday as investors waited to pair jobs data with an updated inflation reading. Bank stocks are up almost 40% from a year ago amid falling interest rates and expectations of increased demand for loans, as well as hopes for deregulation after the election of the president Trump’s victory in November.

US employers added 227,000 jobs in November. The gains compare to the upwardly revised 36,000 jobs added in October. But November’s rise was largely attributed to a recovery from delays caused by Hurricane Milton and a temporary strike at aircraft maker Boeing, as opposed to a surge in hiring that could reignite wage pressure and, by extension, inflation which could delay a rate reduction. Workers marginalized by the storm returned to work, and thousands of striking Boeing employees also returned to work.

Still, the average hourly wage in November rose 13 cents, or 0.4%, to $35.61. Over the past 12 months, wages have increased by 4%, surpassing the latest figure for the annual inflation rate – 2.6% in October.

“The fire of inflation has not been extinguished, with core consumer price increases still elevated and wages once again rising,” said Chris Rupkey, chief economist at FwdBonds.

So, before diving back into rally mode, banking investors want to have assurance that the Ministry of Labor consumer price index for November there was no peak. This data should be released Wednesday morning.

“CPI will be a potential market driver,” said Chris Nichols, director of capital markets at SouthState Bank in Winter Haven, Florida.

The Federal Reserve’s decision on a third interest rate cut in the second half of 2024 should follow on December 18. Policymakers cut their benchmark rate by 50 basis points in September and by 25 basis points last month. This followed two years of high rates.

The recent rise in borrowing costs has had a considerable impact without having the feared side effect of tipping the economy into recession. The gross U.S. economy grew at an annual rate of 2.8% in the third quarter, following growth in the first half, according to federal data.

After the last employment report, the Federal Reserve Bank of Atlanta estimates that the economy would grow by 3.3% in the current quarter.

Still, inflation remains well above the Fed’s preferred long-term level of 2%. That’s the level at which the economy can grow steadily without price shocks, officials say.

Earlier this month, Fed Chairman Jerome Powell said the economy’s continued strength gives policymakers room to be patient on rate decisions. Other Fed officials said they anticipated further interest rate cuts, while stressing that these would be subject to changes in economic data, including inflation figures.

That’s why bank investors are cautious this week, Nichols said.

Inflation reached a 40-year high in June 2022 at 9.1%. This developed as a result of the coronavirus pandemic and the supply chain issues it created. Russia’s invasion of Ukraine has also upended global energy markets in 2022 and pushed up oil and gas prices, making the situation worse.

The Fed raised rates 11 times between March 2022 and mid-2023, driving up borrowing costs, reducing spending and helping to lower overall prices. Yet it also dampened loan demand and hampered bank growth last year and throughout the period. first three quarters of 2024.

Median sequential loan growth for banks with less than $10 billion in assets was 1.2% in the third quarter, down from 1.7% the previous quarter and 1.9% a year earlier, according to data from S&P Global Market Intelligence. This follows a slowdown in 2023.

The Fed’s actions also raised the interest rates that banks pay for deposits. When that happened, the difference between what banks paid for deposits and what they earned on loans – known as the net interest margin – narrowed. Shrinking margins tend to hurt banks’ bottom lines, as many rely heavily on income from lending.

“Clearly, a lot of expectations are based on further rate cuts,” said Michael Jamesson, principal at banking consultancy Jamesson Associates.

He noted that before December, bank stocks had seen a recovery in the fall following the presidential election. That was partly due to Trump’s promises of deregulation, which could boost business investment — and borrowing — and potentially pave the way for more bank mergers and acquisitions. The Biden administration has imposed tighter scrutiny on deals, and mergers and acquisitions have slowed in recent years. But expectations of lower rates are also key, he added.

The median total return in November for 211 bank stocks according to an S&P analysis was 13.4%, surpassing the S&P 500’s 5.9% return.