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In One Chart - July 24, 2018

In One Chart: Why Aren’t Rising Rates Helping Lenders?

Even as the hawkish Jerome Powell continues to raise the federal funds target rate, most banks’ share prices are flat or falling. In June, the target rate was raised by 25 basis points to a range of 1.75–2.00%.

The federal funds target rate is the rate at which banks lend to each other short-term, and in turn determines the rate at which banks lend to borrowers. So, it stands to reason that as the fed funds rate rises, so too should the banks’ revenue and share prices, right? Well, not in 2018.

As the chart below shows, three of the top US banks — JPMorgan Chase (JPM), Bank of America (BAC), and Citi (C)— have been relatively flat year-to-date.

The chart also shows a persistent downward trend in both the 10–2 Year and the 30–10 Year Treasury Yield Spreads. This trend implies limited long-term earning potential for banks. Even as the Fed raises short-term borrowing rates, longer term rates aren’t keeping pace — and that’s exactly why bank stocks are sluggish in 2018 — a thinning 10–2 Year spread is usually indicative of a worsening economy.

As for the short-term outlook, banks are feeling the pressures of volatility just like the overall economy. Uncertainty surrounding economic policies have caused significant turbulence for the market, and bank stocks are not immune. Every significant gain banks have posted on the year has been negated by systemic volatility shortly thereafter.

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