What happened
Shares of many bank stocks moved higher today as Congress passed the debt ceiling bill last night and the market reacted positively to the May jobs report released this morning.
Shares of the credit card and payments company American Express (AXP 0.83%) traded roughly 4% higher as of 12:32 p.m. ET today. Meanwhile, shares of PacWest Bancorp (PACW +0.00%) traded nearly 14% higher, while shares of KeyCorp (KEY 0.41%) were up about 6%.
So what
Last night, after months of negotiations and political tension, the U.S. Senate approved a bill that would suspend the debt ceiling until 2025, paving the way for President Biden to sign the bill into law and avoid what would be a disastrous default by the U.S. government.
Image source: Getty Images.
On top of that, new data from May released this morning showed that the U.S. economy added 339,000 jobs last month, far more than the 190,000 that economists had been expecting. The unemployment rate also rose to 3.7%, which is higher than the 3.5% that economists had projected. Average hourly earnings rose 0.3% in May, in line with expectations.
The Federal Reserve has been watching the labor market very carefully because it believes the strength of the labor market has been allowing consumers to spend through higher consumer prices and exacerbate inflation. Ultimately, the Fed believes the labor market needs to soften in order for it to win its war with inflation. The May report is interesting because hiring accelerated, suggesting a hot labor market, but unemployment rose.
"The U.S. labor market continues to demonstrate grit amid chaos -- from inflation to high-profile layoffs and rising gas prices," said Manpower Group's president and chief commercial officer Becky Frankiewicz, according to CNBC. "With 339,000 job openings, we're still rewriting the rule book, and the U.S. labor market continues to defy historical definitions."
For a company like American Express, which is a big credit card lender, the report indicates that consumers are still quite resilient, which could continue to promote healthy credit quality, at least in the near term, a very important aspect of American Express' business. Recent data also shows that travel in the U.S. remains strong, which is another big part of the company's business.
NYSE: AXP
Key Data Points
For the rest of the banking system, the report leaves open the possibility of a soft or decent landing for the economy, where inflation slows but there is not a severe recession. Banks would benefit from this scenario because the end of rate hikes would ideally allow deposit costs to stabilize, while avoiding a severe recession would hopefully keep loan losses manageable.
Now what
Currently, traders are largely betting that the Fed will pause its interest rate hikes at its June meeting and then possibly raise them a quarter-point in July, so nothing has been decided yet. We'll likely need more data to see if the Fed can be done for good.
But the jobs report today offers a reprieve for the economy, as it does show some cracks in the labor market, while also showing there are still pockets of strength and that the economy could still land on its feet.
I think American Express is a great stock to own that can navigate a recession due to its strong, high-quality customer base. KeyCorp has also been oversold in my mind and trades at an attractive valuation. PacWest has been one of the most volatile bank stocks since the banking crisis, but if it can navigate the next few months, there could be a lot of upside. Still, I probably wouldn't recommend taking anything other than a small, speculative position in the stock right now.
