Bank stocks enjoyed one of their strongest days ever Wednesday following a favorable government report that dampened investors' concerns about a hike in interest rates. The Standard & Poor's bank index rose 4.65%, its seventh-highest daily gain, as the sector handily outpaced the rest of the market.

Bank stocks rallied in tandem with Treasury bond prices, which got a boost after the Commerce Department said that orders for U.S. durable goods fell 1.3% in September. The decline suggests that the economy is running smoothly with little hint of inflation.

The Standard & Poor's bank index has risen about 13.6% since hitting a six-month low of 550.19 on Oct. 15. The Dow Jones industrial average, on the other hand, has only gained 0.04% in the same period. Most of the gains have been staggered, but many market observers said that some optimism has been creeping back into the market.

"There has been a lot of good news for banks recently," said Frank Barkocy, a senior analyst at Keefe Managers in New York. Investors are cheered by the "rally in bonds and the news on HR 10 (financial reform legislation). The market could also be reacting positively to Robert Rubin's appointment to Citigroup's board."

The Dow Jones industrial average rose 0.90%. The Nasdaq bank index rose 1.51% and the S&P 500 1.15%.

Some of the biggest gainers of the day included J.P. Morgan & Co., up $7.125, or 5.87%, to $128.50; Citigroup Inc., up $2.9375, or 6.06%, to $51.4375; and Chase Manhattan Corp, up $4.6875, or 6.02%, to $82.50.

Bond prices, a key influence on bank stocks, also were buoyed Wednesday by expectations in some quarters that the European Central Bank will likely raise interest rates in the near term, said Scott J. Brown, chief economist with Raymond James & Associates, St. Petersburg, Fla. The European Central Bank meets Nov. 4.

Unlike the U.S. Federal Reserve Board, which takes "baby steps when it raises interest rates," the European Central Bank "is more likely to take big steps and gets concerns about inflation out of the way," Mr. Brown said. "That sentiment caused European bonds to rally, which caused a rally in our bonds."

Mr. Brown said our market looks more favorably on a tightening of interest rates in Europe because "European Central Bank officials are viewed as being tougher on inflation," said the economist. "Traditionally the U.S. tends to wait too long to raise rates." Others noted that the resolution in interest rates appears to be approaching.

Additionally, strong earnings and the prospect of legislation that will bring down the Glass-Steagall restrictions and free banks to sell other financial products, such as insurance, stocks, and bonds, has helped bring optimism back into the sector, said analysts.

But many other market observers are cautious about the future of bank stocks, particularly in coming weeks. The momentum could easily be lost if today's economic reports prove unfavorable.

Today the government is expected to release the Employment Cost Index, a closely watched measure of inflation at the wage level, and Gross Domestic Product figures, which some economists see as a wild card.

"GDP numbers could be higher than expected because the government is adding software expenses and no one is sure how much that will add to growth," said Mr. Brown of Raymond James.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.