Floor of the New York Stock Exchange: Investors have ploughed $391bn into ETFs in the first seven months of 2017 © Bloomberg

Banks were a bright spot in an otherwise soggy US equities market on Tuesday, with the industry already poised to post its best week since late June, following hawkish Federal Reserve commentary and upbeat data on the economy.

The widely followed KBW banks index climbed 0.2 per cent on Tuesday, bringing its week-to-date advance to 1.9 per cent. In contrast, the broad S&P 500 was little changed on Tuesday, consolidating after gaining 1 per cent in the previous session.

Investor sentiment on lenders has warmed since last week as Treasury yields have risen, and the yield curve has steepened. The 10-year yield, for instance, has jumped 8.4 basis points since last Friday to 2.27 per cent. Meanwhile, the difference between 10- and two-year Treasury yields — a key indicator of the steepness of the yield curve — hit its highest level in a month. 

Banks are seen as sensitive to fluctuations in rates, since part of their businesses rely on borrowing on the short-term market and then making loans over longer periods. Bank of America, which has a bigger retail banking business than some of its big bank peers, has rallied 2.6 per cent this week to $24.47. JPMorgan Chase has risen 1.4 per cent to $92.73, while Citigroup has gained 1.8 per cent to $67.97 and Wells Fargo has also tacked on 1.8 per cent to $52.85. 

Last week, rates and bank shares took a hit after tensions swelled between the US and North Korea, sending investors shifting into perceived havens.

William Dudley, the influential head of the New York Fed, said on Monday that he would favour raising rates for a third time this year as long as the economy continued to make progress. That came as investors began to doubt whether the central bank would be willing to tighten monetary policy again in 2017 given a string of disappointing inflation readings. 

Rates pushed higher again on Tuesday as investors responded to data that showed US retail sales climbed in July by the most in seven months, coupled with an upward revision to the June reading, which further heightened speculation of more Fed monetary tightening. 

“With consumer confidence at firm levels, employment continuing to rise and wages showing some evidence of picking up, we remain optimistic on the prospects for consumer spending,” said James Knightley, chief international economist at ING. 

Despite the rally in financials, US stocks struggled for direction as investors digested the upbeat data alongside a batch of mixed results from retailers. 

After clocking its best day since April on Monday, the S&P 500 fluctuated between losses and gains and ended the day 0.1 per cent lower at 2,464.61. Meanwhile, the Dow Jones Industrial Average was flat at 21,998.99 while the Nasdaq Composite was 0.1 per cent lower at 6,333.

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