Bank stocks enjoyed a good holiday-shortened week, with the SPDR S&P Bank ETF (NYSEARCA:KBE) rising 4% as interest rates continued their rise.
Federal Reserve Chairman Jay Powell will appear for what used to be called the Humphrey-Hawkins testimony on Tuesday, starting with the Senate Banking Committee.
The consensus wisdom is that bank stocks should also go up with higher rates. But with the new Fed policy of lower for longer, the words of Powell will be more closely parsed for basis points.
Long-term rates have moved sharply up in the last couple of weeks. The 10-year Treasury yield moved up to as high as 1.35%. Real rates, the difference between nominal rates and inflation expectations, have jumped even further. The 10-year TIPS rate is up about 25 basis points in a week to around -0.81%.
Bank stocks have been rallying, up 18% year to date. A lot of that has to do with the idea that the rate moves can help net interest margin.
But with the Fed’s QE program, the move in long-term rates doesn’t really help banks.
Banks make most of the loans on a short-term basis, most five years out or fewer for personal and commercial loans. If the Fed keeps its asset management program as is, there’s little help for the banks.
In a yield-curve steepening, the longer rates gets higher while the important low-end rates important to banks stay put.
Powell will be asked about the recent rate moves and, while he is almost sure to say what he as said before and say rates are lower for longer, he may give a hint to yield targeting.
That would require the Fed to move from just buying assets to targeting a price for the longer Treasury rates.
In October, Powell said that while the "Fed also reviewed yield curve control at its latest policy meeting, its effectiveness still an open question."
But, because of their reliance on the short end of the curve, rate-targeting wouldn't hurt banks much at all.
KBE just moved into overbought territory on Friday. Its 14-day relative strength index hit 70.16.
JPMorgan Chase (NYSE:JPM) rose 4.8% for the week and Bank of America (NYSE:BAC) rose 3.5%. Citi (NYSE:C) rose 3.4% and Wells Fargo (NYSE:WFC) jumped 13% on progress from the Fed.
The recent rise in real rates may be more of a threat to stocks like Apple.