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It's been a good day for the Big Four banks -- Bank of America (NYSE: BAC ) , Citigroup (NYSE: C ) , JPMorgan Chase (NYSE: JPM ) , and Wells Fargo (NYSE: WFC ) -- with all of the members up over 1% as they head toward the closing bell. Driving the day's rally were a series of headlines that put the banks squarely in investors' view, and though some of the news has been mixed, confidence in the banks seems to be growing.
This week is a big news week for bank investors, with housing providing a lot of food for thought. Yesterday's Case-Shiller Price Index reported that home prices have risen by double-digits for the third consecutive month. This may have cushioned the blow from this morning's news that new mortgage application activity has fallen for the seventh straight week. Despite another 2% decline since last week, applications for new home mortgages are still up 3.5% from last year's levels.
For the banks, this news does seem concerning since investors have put a lot of focus on revenue growth for their investments. Since the majority of the decline in new application activity has been focused on the refinancing side, the banks may get a bit of help from the next headline of the day.
After the two day Federal Open Markets Committee meeting, Fed chairman Ben Bernanke made the committee's announcement this afternoon. Based on revised growth numbers for the second quarter that paint a picture of only modest growth for the economy, Bernanke noted that the committee would not make any changes to its current stimulus policy. The Fed will continue to purchase $85 billion in bonds per month and will keep the Fed Funds rate near zero until economic targets are met. The Fed has set its unemployment target at 6.5%, at which point it will begin moving interest rates, but the current 7.6% unemployment rate is not expected to fall that far anytime soon.
For the banks, this is a double win -- investors can now take a breather from the speculation that's been driving volatility, and interest rates for loans may fall back to the lows seen in May. According to the Mortgage Banker's Association, rates remained unchanged last week after having fallen a tenth of a percent the week before. With the recent spike in interest rates -- caused by Fed-tapering fears -- the demand for home refinancing loans has dropped dramatically. If interest rates fall following Bernanke's address, there may be a better chance for a revision of the current declining trend in applications.
Now for some bad news, though it comes on a day when investors are focused elsewhere. A federal court struck down the Federal Reserve's cap on debit card transaction fees that banks can charge to retailers. Set at $0.21 per transaction, the retailers had argued that the cap was too high. The court called the Fed's cap "arbitrary and capricious," while suggesting that it take into consideration earlier recommendations from staff members to lower the cap to $0.12.
While this will put a dent in the fee-generated revenue the Big Four bring in from debit transactions, investors don't seem too concerned that the cuts will cause a great deal of damage. However, the last time a cap was revised, the banks had a tough time trying to offset the losses in income. The famous kerfuffle revolving around debit card fees to customers back in 2011 from Bank of America, JPMorgan, and Wells Fargo all stemmed from an attempt to recapture some fee revenue. And we all know how that ended.
Weighing the news
All in all, it's been a good day for the Big Four. Investors have weighed the headlines and found that the Fed's plan to stay the course is a big benefit to the financials, even enough to outweigh some of the bad news today. As a long-term investor, one day's headlines shouldn't drive your investment plan, but being knowledgeable about how such news will affect your portfolio is crucial.
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