Bank Rally Fizzles Out As Investors Look to Fed

Here we go again.

After a short-lived rally in bank stocks, a resumption of fears that interest rates would climb sank them again.

The fears were in anticipation of the government's employment report, which will be released today. The market expects the report to show a strong increase in jobs, creating more pressure on the Federal Reserve to tighten monetary policy.

"The market is already trying to figure out whether the Federal Reserve will increase interest rates at its November meeting," said Kenneth Mayland, chief economist at KeyCorp in Cleveland. "If any economic data come out suggesting a strong economy," he said, the market will interpret that as meaning higher rates.

That sort of thinking gripped investor sentiment by late afternoon, sending bank stocks lower in the last hour of trading.

The Standard & Poor's bank stock index fell 1.59%, and the Nasdaq bank index 1.03%. These declines outpaced those of the Dow Jones industrial average and the S&P 500, which both dropped marginally.

The day's biggest decliners included San Francisco's Bank of America Corp, which fell $2.1875, or 3.72%, to $56.6875; Milwaukee's Firstar Corp. $1.0625, or 4.06%, to $25.125; and Cincinnati's Fifth Third Bancorp $1.5625, or 2.44%, to $62.4375.

The S&P bank index began with a slight rise, but conditions deteriorated throughout the session. Some banks -- such as New York's J. P. Morgan & Co., Chicago's Bank One Corp., and Charlotte, N.C.-based First Union Corp. -- began the day up, but ended down.

Earlier in the week bank stocks rallied a bit, first in expectation that the Federal Reserve would not raise interest rates at Tuesday's meeting of its policy-making Open Market Committee. But on Tuesday they plummeted in the afternoon after the Fed confirmed that it would not raise rates immediately, but said, looking forward, it was "biased" toward tightening. Bank stocks plunged following the report, but recovered sharply, ending the day down a tad.

On Wednesday they snapped back nicely, giving some observers hope that a bottom had been reached. Several analysts predicted that the Fed would not raise interest for the remainder of 1999. But such sentiment did not last long.

"Even though there was a rally in the group, there is uncertainty going forward," said a trader.

"Clearly some people are fishing for some stocks," Sally Pope Davis, a bank analyst at Goldman, Sachs & Co., said in the morning before the downturn emerged.

"Bank stocks have had an extraordinary bounce in the last two days," said Lawrence Cohn, a bank analyst at Ryan, Beck & Co., Livingston, N.J. "It's time for a pause" until the earnings come out, he said.

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