Bank stocks' recent rally came to an abrupt halt Thursday morning after the Commerce Department reported unexpectedly strong demand for the construction of new homes in April, depressing the 30-year Treasury bond.
In the last eight trading days through Wednesday, the Standard & Poor's index of major banks rose 5.6% amid signs of modest economic growth. The broader S&P 500 rose 3.8% in the period .
But on Thursday, the S&P bank index fell more than 1% in early trading, and ended down 0.24%.
The Commerce Department report came as a shock because this spring's rise in interest rates was expected to impede orders for new homes - known as housing starts.
A survey of 14 economists by Dow Jones published on Tuesday predicted that figure would decline 1.6%. In March, it declined 5.2%.
But the Commerce Department reported housing starts actually rose in April, by 5.9% for an annualized rate of 1.52 million units - the highest level in more than two years. Signs of rapid economic improvement spark fears of inflation, which saps the value of bonds.
As a result, the yield on the 30-year Treasury bond had risen 7 basis points to yield 6.92% during late afternoon trading, while its price, which moves in the opposite direction, had fallen nearly two points.
Bank stocks, which are commonly viewed by investors as interest-rate sensitive, usually decline when Treasury yields rise.
"We have been through this economic drill before," said Michael Mayo, a bank analyst with Lehman Brothers. Positive economic news will depress bank stocks in the short term, he said, but in the longer term they should still perform well.
Mr. Mayo attributed the decline in the morning to profit taking after the rally earlier in the week.
In the past week, signs that the economy was not expanding at a rapid pace eased concern of inflation. The yield on the 30-year Treasury had fallen from above 7% to 6.85%.
Despite the surprising housing-starts figure, there was more evidence Thursday that inflation was subdued. A report by the Federal Reserve Bank of Philadelphia on manufacturing indicated inflation was under control in that region.
And a preliminary agreement under which the United Nations would allow Iraq to sell some of its oil caused the price of that commodity to fall. The rise in gasoline prices over the past two months had also fanned inflation fears.
Among the top banks, there were few major winners or losers. First Union Corp., fresh from a bullish analyst presentation on Wednesday (see story on page 1), rose 12.5 cents to $64.
Industrial Bancorp, a small thrift in Bellevue, Ohio, fell 19.84% to $12.625 - on five times the average daily volume of 28,000 shares. The company completed a $19.4 million return of capital to shareholders Wednesday in an effort to reduce its high leverage ratios.
Nasdaq treated the event as if the company was ending a dividend, an action that caused the value of the stock to decline, the thrift said. The company still pays a quarterly dividend.