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Rate Hike in June Looming Large: 4 Financial Picks

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Minutes from the latest FOMC meet indicated that the Fed is set to hike interest rates gradually this year. However, a June hike is almost certain. The committee is of the view that broadly encouraging economic conditions, even as inflation nears the 2% level, would make conditions appropriate for a rate hike “soon.”

Further, tight labor market conditions and growing wages make the conditions ideal for gradually hiking interest rates. Economists largely believe that there might be three or four rate hikes in 2018. Under conditions in which interest rates are likely to remain high, investing in financial stocks seems prudent.

June Hike in the Offing

In the recently concluded Fed meet on May 2, the Federal Open Market Committee jointly agreed to hold the interest rate steady. However, the committee acknowledged rising levels of inflation. The members noted that on a 12-month basis, overall inflation as well as inflation for items excluding food and energy, inched close to 2%.

The minutes from the meeting, indicated that though the rate hikes would be gradual this year, a hike is inevitable in June. This is because most of the members stated that it would “soon be appropriate” to hike rates. Further, the minutes also stated that an upsurge in inflation would prove to be helpful.

Moreover, the committee believes that gradual increments in federal funds rate would sustain the current level of economic growth. Under tight labor market conditions and inflation levels near the targeted rate of 2%, a gradual path toward raising rates would prove to be consistent with overall economic growth.

Economists vehemently predict a possible rate hike by the Fed in its Jun 13 policy meeting. Notaby, CME’s FedWatch Tool predict a 100% probability of a hike in interest rate levels in June.

Patrick Harker Expects a Spate of Rate Hikes This Year

On May 21, Philadelphia Fed President Patrick Harker stated that rising inflation levels in the United States should encourage the Fed to hike interest rates by two or maybe three more times this year. He further stated that the next hike could take place as early as in June.

He reasoned that since inflation is fast closing in on the targeted 2% level, a hike in interest rate should not be delayed. Notably, the PCE price index rose to an annual rate of 2% in March from 1.7% in February.

During the monetary tightening in March, when the Fed introduced a quarter point hike in the rates to 1.5-1.75%, Harker estimated two hikes this year. However, given the acceleration in inflation levels and the absence of any “slack in the labor markets,” he supports a third hike which he feels would bode well for the economy.

4 Hot Choices

Consistent economic growth, robust labor market conditions and rising wages have raised the possibility of a rate hike in June. Further, minutes from Fed’s latest meeting show that a vast majority of the committee members support the decision to soon hike interest rates.

In this context, we have selected four financial stocks that are expected to gain from these factors. These five stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Popular, Inc. (BPOP - Free Report) is a provider of retail, mortgage and other commercial banking products and services.

The company is based out of Hato Rey and carries a Zacks Rank #1. The company has expected earnings growth of 59.89% for the current year. The Zacks Consensus Estimate for the current year has improved 10% over the past 60 days.

Commerce Bancshares, Inc. (CBSH - Free Report) is a provider of retail, mortgage banking, asset management and investment services.

The company is based out of Kansas City and carries a Zacks Rank #1. The company has expected earnings growth of 30.23% for the current year. The Zacks Consensus Estimate for the current year has improved 7.4% over the past 60 days.

Comerica Inc. (CMA - Free Report) is a provider of retail banking and wealth management services.

The company is based out of Dallas and carries a Zacks Rank #2. The company has expected earnings growth of 40.30% for the current year. The Zacks Consensus Estimate for the current year has improved 4.9% over the past 60 days.

Northern Trust Corporation (NTRS - Free Report) is a provider of asset servicing, fund administration, fiduciary and banking services.

The company is based out of Chicago and carries a Zacks Rank #2. The company has expected earnings growth of 33.18% for the current year. The Zacks Consensus Estimate for the current year has improved 5.2% over the past 60 days.

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