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Wage Spike Seals December Rate Hike: 5 Picks

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On Nov 2, Treasury yields soared after wages increased by a record level in October. Job additions easily outperformed estimates even as the unemployment rate remained flat at a 49-year low. These developments strengthened the view that the Fed would attempt to control inflation by announcing further rate hikes. The Fed is widely tipped to raise rates after its meeting in December.

Last month’s spurt in wages more or less seals the deal on another rate hike for the year. A flurry of bullish economic reports released recently has made bonds less attractive compared to their equity counterparts. 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 Hit Nine-Year High

According to a fresh report from the Department of Labor, the U.S. economy added 250,000 jobs in October, significantly higher than the estimated level of 193,000. This rebound in employment occurs after the plunge in hiring caused by Hurricane Florence.

Meanwhile, average hourly earnings increased by 5 cents or 0.2% to $27.30. The figure was in line with estimates and marginally lower than September’s increase of 0.3%. However, the year-over-year increase in wages increased from 2.8% to 3.1%. This is the fastest pace of wage increases recorded since early 2009.  

Substantial wage hikes announced by major employers like Amazon (AMZN) are likely responsible for the strong increase noted in wages. Restaurants and retailers have substantially raised wages. Costco (COST) boosted its entry level pay by $1 an hour in June. Also, Microsoft (MSFT) has reportedly handed out large bonuses to stay ahead in the cloud computing race.

Yields Spike, December Hike Likely

Consequently, the yield on the 30-year Treasury bond increased 6.7 basis points to 3.454%, a fresh four-year high. This resulted in a weekly increase of 13.9 basis points, the widest such increase since Oct 5. The yield on the 10-year Treasury note increased 7 basis points to 3.214%, its highest level in three weeks. This brings its weekly increase to 13.7 basis points, also the highest since Oct 5.

The spike in wage growth more or less confirms a December rate hike from the Fed. This increase was widely expected in any case. But it is important to note that the Fed adheres to the belief that a slide in unemployment results in higher wage growth. This in turn results in higher inflation. According to the CME Fedwatch tool, the odds of the Fed hiking rates to 2.25%-2.50% post a December 18-19 policy meeting is 81% as of Nov 2.

Our Choices

October’s spike in wage gains clearly indicates that the labor pool continues to tighten even as the jobs market hovers near full employment. This is likely to lead to further wage increases, causing the Fed to hike rates to combat inflationary pressures. In such an event, a rate hike in December is more or less inevitable.

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.

The Bancorp, Inc. (TBBK - Free Report) is the holding company for The Bancorp Bank which offers a variety of banking products and services.

Bancorp has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 45.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 30 days.

Bank of Commerce Holdings (BOCH - Free Report) is the holding company for Redding Bank of Commerce that offers banking services to both individuals and businesses.

Bank of Commerce’s expected earnings growth for the current year is 42.2%. The Zacks Consensus Estimate for the current year has improved by 5.2% over the last 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

JPMorgan Chase & Co. (JPM - Free Report) is a financial holding company with assets worth $2.62 trillion and stockholders’ equity worth $259 billion as of Sep 30, 2018.

JPMorgan Chase has a Zacks Rank #2 (Buy). The company has expected earnings growth of 35.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 30 days.

U.S. Bancorp (USB - Free Report) offers a variety of financial services in the United States. The company has operated a well-balanced business model, with non-interest income representing 44% of net revenue in 2017.

U.S. Bancorp has a Zacks Rank #2. The company has expected earnings growth of 19.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.6% over the last 30 days.

Citigroup Inc. (C - Free Report) is a globally diversified financial services holding company providing a range of financial products and services.

Citigroup has a Zacks Rank #2. The company has expected earnings growth of 25.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 30 days.

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