Bank stocks rallied with the overall market Monday, as German rate cuts kindled hopes of further easing moves by the Federal Reserve.
High interest rates -- roughly six percentage points higher than in the United States -- encouraged international investors to move funds into Germany. This flow of global money weakened the dollar and curbed the Fed's ability to ease.
But Monday's rate cuts by the Bundesbank, Germany's central bank, eased pressure on the dollar and may give the Fed room to reduce the discount rate and its target for the federal funds rate, both currently 3%.
The discount cut could come as soon as this week, and this would likely be followed by a reduction in bank's prime rate, now at 6%.
|Big Psychological Change'
"The German rate cut caused a big psychological change," said Thomas Brown, an analyst with Donaldson, Lufkin & Jenrette Securities Corp.
"Part of the reason that the bank stocks were correcting is that people were concerned about the direction of the economy, with German rates going higher and higher."
J.P. Morgan & Co. and Bankers Trust New York Corp. got the biggest lifts from the new rate environment. Morgan jumped $2 to $62.375, and Bankers rose $1.625 to $63.875.
Other big gainers included BankAmerica Corp., up $1.625 to $44.875; NationsBank Corp., up 87.5 cents to $44.75; and Chemical Banking Corp., up $1.50 to $32.25.
First Chicago Corp. rose $2.375 to $33. It announced it will speed up the disposition of $2.1 billion of low-quality real estate holdings and take a one-time special provision of $625 million in the third quarter.
While the move may hurt the bank in the near term, analysts increased earnings forecasts.
The Bundesbank on Monday cut two key interest rates, the Lombard rate by a quarter percentage point to 9.5% and the discount rate by a half percentage point to 8.75%.
The reductions were aimed at easing monetary strain in Europe as a result of high German interest rates.
French Appeasement Move
The cuts were enough to awaken the market from a summer slumber. The Dow Jones industrial average gained 70.52 points Monday to close at 3,174.64.
Donaldson, Lufkin & Jenrette Securities Corp., advised clients to reduce their cash holdings and increase equity investments in anticipation of lower long-term rates.
Some economists pointed out that the 25-basis-point reduction in Germany's Lombard rate brought German rates only slightly closer to U.S. rates.
The Bundesbank's cut was seen as an attempt to appease the French, who will vote this weekend on the Maastricht Treaty to create a European monetary union.
Further Easing Expected
U.S. investors, however, interpreted the cut as a signal that the Bundesbank would be more likely to ease again rather than increase rates.
The Fed last eased on Sept. 4, when it cut the funds rate target by 25 basis points to 3%. Economists said the Fed will wait for this week's economic data before deciding on whether to cut rates further.
The commerce Department releases data on retail sales today, industrial production Wednesday, and jobless claims Thursday.
Job Losses Expected
"The data are likely to be weak, and the Fed will probably ease again," said Alan Lerner, chief economist at Bankers Trust.
If the Fed doesn't ease this week, it may wait until the employment data for September are released on Oct. 2.
Steven Slifer, an economist with Lehman Brothers, believes the economy will lose at least 225,000 jobs, primarily because of the end of the federal summer jobs program and the hurricane that hit Louisiana and Florida.Banner DaySelected bank stock prices Price at Increase 4 p.m. on dayFirstChicago $33.00 $2.375J.P. Morgan 62.375 2.00BankAmerica 44.875 1.625BankersTrust 63.875 1.625ChemicalBank 32.25 1.50Source: Reuters