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Wage Spike Likely to Fuel Rate Hikes: 4 Bank Picks

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August’s strong jobs numbers have clearly indicated that the economy is in great shape. But the highlight of the report was the spike in wage gains at the fastest pace since the end of the Great Recession. This boosted the yield on the benchmark two-year U.S. Treasury Note to its highest level in more than a decade. The pace of wage gains nearly ensures that a rate hike will take place later this month.

Additionally, comments from the Boston Fed President indicate that further tightening may be in the offing. This means that another hike is likely in December. An increase in rates widens the yield spread for banks, which in turn boosts their margins. Adding banking stocks to your portfolio looks like a smart option at this point.

Wage Gains Take Yields to 10-Year High

According to the latest report from the Department of Labor, average hourly earnings increased by 10 cents to $27.16 in August. Consequently, the metric has increased by 77 cents or 2.9% over the past year. This is the fastest pace witnessed since June 2009, the last month of the Great Recession.

The spurt in wage gains boosted the yield on the benchmark two-year U.S. Treasury Note to 2.707%, its highest level since Jul 30, 2008. According to Bank of the West’s chief economist Scott Anderson, the rise in wages virtually confirms that a rate hike will take place after Fed’s September meeting. Further, it “raises the probability” of another rate hike in December.

A large number of inflation indicators lined up for release later this week should put any thoughts to the contrary to rest. While data for PPI is slated to be released on Wednesday, the next two days will witness the release of CPI and import price index data, respectively.

Boston Fed’s Rosengren Maintains Hawkish Stance

Around two years ago, Boston’s Fed President Eric Rosengren had shed his earlier dovish stance to adopt a hawkish tone on monetary policy. And he continues to maintain his stance, stating that rate increases could continue for an extended period. Eventually, rates would end up significantly above current expectations as the economy goes from strength to strength.

Speaking to Reuters on Sep 8, Rosengren stated: “There is an argument to normalize policy and probably be mildly restrictive.” The Boston Fed President thinks that there is no need to speed up the pace of rate increases at present. However, the pace of growth, strength in the labor market and trade tensions warrants an increase in the pace of rate hikes.

This means that two more rate hikes are nearly certain over the rest of this year. An additional three will take place on 2019. The cumulative effect of these increases would boost the key rate to 3% by the end of 2019.

Our Choices

The spurt in the pace of wage increases is a clear indicator of the inflationary pressures building up in the economy. This is why the latest jobs report confirms that another rate hike is likely later this month. Additionally, the odds of a rate hike in December have also gone up significantly.

Adding banking stocks to your portfolio looks like a profitable option at this time. This is because these are likely to benefit from the widening of the yield spread. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

SunTrust Banks (STI - Free Report) is a diversified financial services holding company. It operates through its principal banking subsidiary SunTrust Bank, which provides various financial services to individuals and corporate customers in the United States.

SunTrust Banks has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 39% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 30 days.

Comerica (CMA - Free Report) is a banking and financial services company.

Comerica’s expected earnings growth for the current year is 50.8%. The Zacks Consensus Estimate for the current year has improved by 5.1% over the last 60 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Northern Trust Corporation (NTRS - Free Report) is the holding company for its main subsidiary, Northern Trust Company, as well as a number of other banking and non-banking financial service subsidiaries.

Northern Trust has a Zacks Rank #2. The company has expected earnings growth of 38.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days.

M&T Bank Corporation (MTB - Free Report) is the holding company for M&T Bank and Wilmington Trust, National Association.

M&T Bank has a Zacks Rank #2. The company has expected earnings growth of 37.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.9% over the last 60 days.

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