Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.
The 10-year-2-year yield spread has more than reversed all of its gains since the U.S. election, while regional banks have held up better. This divergence is unlikely to hold for long: in our view, either the yield curve will start steepening again, or regional banking stocks will drop sharply to "catch down" with the recent drop in interest rates.
As we noted earlier this week, a Fed rate hike in less than two weeks' time was basically a "done deal" heading into today's Non-Farm Payrolls report (see"Sector showcase: The utility of utilities for handicapping the Fed" for more). When the jobs figures were released, at least a few traders had to reevaluate that outlook.