The yield curve of U.S. government bonds of different maturity dates has steadied in September and taken a firm north-bound trend after inverting for several days in August. Eliminating investors’ concerns of a disappointing September following a stock market rout in August, U.S. stocks performed impressively in the first half of this month owing to positive developments on the trade war front and better than-expected U.S. economic data.
Government Yield Curve Steadies in September
On Sep 13, the yield on the benchmark 10-year U.S. Treasury Note closed at 1.84%. The yield on long-term 30-year U.S. Treasury Note finished at 2.31%. The 10-year and 30-year notes jumped 30 and 32 basis points, respectively, for the week ended Sep 13. This was the two government bonds highest weekly yield gain since November 2016.
Meanwhile, the yield on 2-year U.S. Treasury Note ended at 1.77%, reversing yield inversion with 10-year notes. Several economists consider the yield inversion between the 2-year and 10-year notes as a clear indication of an impending recession. The yield on short-term 3-month U.S. Treasury Bill closed at 1.966% eliminating its yield inversion with the long-term 30-year note, another indicator of an impending recession.
Possibility of Interim Trade Deal
On Sep 12, President Donald Trump told reporters that he is not averse to an interim trade deal with China although his preference will be to have a full agreement resulting in a complete trade deal with the Asian economic powerhouse.
Earlier that day, Bloomberg reported that high-level officials of the Trump administration are considering offering an interim trade deal to China. Bloomberg cited five internal sources that say the U.S. government would like to delay imposing new tariffs on Chinese goods or it may even roll back some tariffs that are already levied on China for the first time since the trade dispute started in March 2018.
In return, the U.S. government wants China to substantially increase imports of domestic agricultural products. Also, more importantly, the Chinese authority must comply with their earlier commitments related to the use and application of intellectual properties, before the trade negotiation broke down in May.
Moreover, President Trump delayed imposing 30% tariff instead of the existing 25% on $250 million of Chinese goods from Oct 1 to Oct 15. On the other hand, China exempted several U.S. agricultural products from new tariffs including soybean and pork meat.
Strong U.S. Economic Data
On Sep 13, the Department of Commerce reported that U.S. retail sales for the month of August increased 0.4%. Although this figure is half the 0.8% rise in July’s retail sales, it surpassed the consensus estimate of growth of 0.2%.
Notably, Wall Street witnessed a rout last month due to government yield curve inversion on the back of heightening trade tensions between the United States and China, and fears of a global economic slowdown. Retail sales growth in July and August indicates strong consumer spending in the third quarter of 2019 after it rebounded in the second quarter. Notably, consumer spending accounts for more than 70% of the U.S. economy.
The University of Michigan’s preliminary consumer sentiment index for the month of September grew to 92 from 89.8 in August. The current economic conditions index, which indicates consumer’s thinking about the present economic condition, rose to 106.9 from 105.3.
On Sep 12, the Department of Labor reported that U.S. initial claims declined by 15,000 to its five-month low level of 204,000 for the week ended Sep 7, the lowest since April 2019. The figure was better than the previous week’s revised figure of 219,000 as well as the consensus estimate of 215,000. The number of continuing claims dropped 4,000 to 1.67 million.
Our Top Picks
A hike in market interest rate will raise the cost of funds, which in turn will enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the sector’s profits.
At this stage, it will be prudent to invest in banking stocks with a favorable Zacks Rank and strong growth potential. We have narrowed down our search to five bank stocks, which have moved higher in the past three months and still have upside left. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks in the past three months.
Hilltop Holdings Inc. (HTH - Free Report) provides banking and financial products and services in the United States. It operates in four segments: Banking, Broker-Dealer, Mortgage Origination and Insurance. The company has expected earnings growth of 50% for the current year. The Zacks Consensus Estimate for the current year has improved by 12.9% over the last 60 days. The stock has jumped 25.9% in the past three months.
First Horizon National Corp. (FHN - Free Report) operates as the bank holding company for First Tennessee Bank National Association that provides various financial services. It operates through four segments: Regional Banking, Fixed Income, Corporate and Non-Strategic. The company has expected earnings growth of 12.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.2% over the last 60 days. The stock has soared 15.4% in the past three months.
Southern First Bancshares Inc. (SFST - Free Report) operates as the bank holding company for Southern First Bank that provides various banking products and services to general public in South Carolina, North Carolina, and Georgia. The company has expected earnings growth of 16.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.1% over the last 60 days. The stock has soared 15.2% in the past three months.
Meridian Corp. (MRBK - Free Report) operates as the bank holding for Meridian Bank that provides commercial banking products and services for small and middle market businesses primarily in southeast Pennsylvania, Delaware, and southern New Jersey. The company has expected earnings growth of 9.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.6% over the last 60 days. The stock has surged 7.3% in the past three months.
Limestone Bancorp Inc. (LMST - Free Report) operates as the bank holding company for Limestone Bank, Inc. that provides a range of commercial and personal banking products and services. It offers deposit products, including checking, savings, and term certificate accounts as well as money market accounts and fixed rate certificates. The company has expected earnings growth of 8.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.3% over the last 60 days. The stock has gained 2.3% in the past three months.
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