Financial Stocks Lead the Dow Higher

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is rebounding following some positive economic reports that have helped quell investors' fears. As of 1:15 p.m. EDT the Dow is up 91 points, or 0.62%, to 14,773. The S&P 500 (SNPINDEX: ^GSPC  ) was up 15 points to 1,587.

There were five U.S. economic releases today.

Report

Period

Current

Previous

Durable-goods orders

May

3.6%

3.6%

FHFA home price index

April

7.4%

7.2%

New-home sales

May

476,000

454,000

Consumer confidence index

June

81.4

74.3

Case-Shiller Home Price Index

April

2.5%

1.4%

The key report here is durable-goods orders, which grew a seasonally adjusted 3.6% in May, slightly below analyst expectations of 3.8%. Excluding the transportation sector, durable-goods orders only rose 0.7%, down from 1.7% growth in April. Rising durable-goods orders are a positive sign for the economy, showing that businesses and consumers are confident enough to invest in goods that are expected to last longer than three years. When consumers and businesses turn pessimistic on the economy, durable-goods orders drop, as they can usually be put off for some time.

The other economic releases all had to do with the gradually strengthening housing market. Last week's comments from Federal Reserve Chairman Ben Bernanke, coupled with a credit crunch in China, set off a wave of selling in the bond markets, pushing up rates across the board. Mortgage rates saw an especially big jump: A month ago buyers could get a 30-year fixed mortgage with a 3.75% interest rate, but the same mortgage now carries a rate of 4.51%. The question is whether the housing market will continue on its upward trend now that mortgage rates have jumped. There's now way to know for sure what will happen, but as members of the Federal Reserve have been emphasizing, the Fed will continue its quantitative easing until the economy does pick up.

While home buyers are not happy about higher rates, one group that's cheering is banks. Today's Dow leader is Bank of America (NYSE: BAC  ) , up 2.5%, while JPMorgan Chase (NYSE: JPM  ) is up 1.9%. Low rates have been both a benefit and a challenge for banks. Historically low rates lead many people to refinance their mortgages, leading to fees for the banks. However, banks' business models depend on their ability to take in deposits at low cost and lend out at higher rates, and that model is difficult when the Fed is working to keep long-term rates low.

In the short term, banks will be hit by rising rates as refinancing activity drops. But over the medium term, they're set to do better as rates rise, increasing the spread between their loan rates and the rate at which they can borrow money.


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