Bank stocks rallied Monday after President Clinton said the federal budget surplus will reach $211 billion in the current fiscal year.
The President's statement eased concern that the Federal Open Markets Committee might raise interest rates at this week's session. He urged legislators to use the surplus to pay off the national debt. The American Banker index of the 50 largest banks rose 1.34%, while its index of 225 banks rose 1.50%.
The surplus is expected to climb to $1.87 trillion over the next 10 years, according to a report by the Office of Management and Budget, an arm of the White House, which in February said the surplus would be $746 billion.
The new report "implies that they will pay down on the national debt much faster," said Scott Brown, chief economist at Raymond James & Associates of St. Petersburg, Fla. "It also means that the U.S. government will have to borrow less, so interest expenses are coming down over the 10-year period."
The announcement deflated anxieties that monetary policymakers would raise interest rates. The Federal Reserve's policy-setting committee meets for a two-day session beginning today. At its last meeting in May, the committee raised interest rates 50 basis points.
The announcement offset the impact of a report by the National Association of Realtors that U.S. home resales jumped 4.3% in May to a seasonally adjusted rate of 5.09 million units. The unexpected jump suggested that the economy is not slowing down as much as many people thought. The increase followed a 6.2% slide in resales in April.
"It's a seller's market," said Kenneth Mayland, president of ClearView Economics LLC, Pittsburgh. "To shake the housing industry to its foundations, it would probably require nothing short of a stock market crash."
Most observers now believe the Federal Reserve will refrain from action at this week's meeting, though it may raise interest rates twice more this year.
Among the gainers in trading Monday were Citigroup, up $1.8125, or 2.93%, to $63,6875; J.P. Morgan & Co. $1.4375, or 1.23%, to $118.4375; and State Street Corp., $3.25, or 3.17%, to $105.875.
"The stock market has the best of both worlds," said Sung Won Sohn, chief economist at Wells Fargo & Co., San Francisco. "The economy is slowing, but not enough to create a major slowdown or economic recession."
Mr. Sohn said investors are putting their money back into old economy or value stocks, including banks. Bank stocks are getting a boost, because fewer rate hikes will mean less pressure on their margins.
But Mr. Sohn said Tuesday's rally probably will not be sustained. "The stocks have a tendency to latch onto the good news but simply ignore the bad news," he said. "Investors continue to live in a dream world, which is the market will continue to go up forever."