Yellen Puts A Crimp In Financial Rally

The Financial Select Sector SPDR Fund XLF rally over the past month has been put on pause this week after Fed Chair Janet Yellen gave some relatively dovish commentary in front of Congress this week. In her testimony, Yellen said interest rate hikes would be both gradual and limited in the near-term, sending stocks higher for the second day in a row.

However, bank investors were hoping that interest rates would continue to rise at a steady pace, allowing banks to expand their historically low net interest margins. Net interest margin is the difference between the interest rates charge for loans and the interest rates they pay out for deposits.

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In the wake of President Trump’s election back in November, the prospects of higher interest rates, corporate tax cuts and financial deregulation has resulted in the financial sector being one of the top-performing sectors of the market. The XLF is up 6.2 percent in the past three months, but fell 0.8 percent on a strong day for stocks on Tuesday.

The XLF lagged in early Wednesday trading as well, trading mostly flat on another up day for the broad market.

Bank investors were hoping that a blowout jobs report last Friday would be all Yellen needed to deliver relatively hawkish commentary to Congress this week. However, in the past two days, the XLF is down 0.6 percent, while the SPDR S&P 500 ETF Trust SPY is up 0.7 percent. The iShares Barclays 20+ Yr Treas.Bond (ETF) TLT is also up 0.8 percent so far this week.

Joel Elconin contributed to this report.

Image credit: Dustin Blitchok