On Apr 30, the Department of Commerce reported that personal consumption expenditure (PCE) price index increased year-over-year to 2% in March, hitting the central bank’s target for the first time in a year. This is the first proper material indication of inflation in the U.S. economy. Notably, PCE index is a key inflation measurement tool and the central bank’s preferred inflation barometer.

As inflation reached the Fed’s target level of 2%, the market is expecting any of the two strategies from the central bank. The central bank may raise the magnitude of benchmark interest rate or it may increase the number of interest rate hike in 2018. It may also speed up the winding down of its bond purchases further.

Whatever may be the fact, higher interest rates will boost bank profits as they increase the spread between longer-term assets, such as loans, with shorter-term liabilities. Moreover, President Trump has decided to do away with most of the regulations set down by the Dodd-Frank Act of 2010, which imposed several stringent banking regulations. Considering these positives, investment in good banking stocks will be very lucrative.

PCE Inflation Reaches Target Benchmark

The PCE price index rose to an annual rate of 2% in March from 1.7% in February. The core PCE index — excluding food and energy — increased year-over-year to 1.9% in March from 1.6% in February. This is the biggest yearly gain in the core PCE inflation rate since April 2012.

Price levels have been driven up by rising cost of oil, higher home prices, and a healthy labor market operating near its full employment level raising wages and salaries. A massive $1.5 trillion tax cut (including corporate and personal income tax) has bolstered both consumer and business confidence.

March data released by the Department of Labor showed that consumer spending rose for the first time in three months, adding fuel to inflation.

Meanwhile, Fed’s two day policy meeting is currently going on. Investors are expecting the central bank to raise interest rate latest by its next policy meeting if not this time.

Trump Administration to Repeal Dodd-Frank Regulations

On Mar 14, the U.S. Senate approved extensive changes to the Dodd-Frank Wall Street reform law enacted by former President Obama in 2010. The U.S. House of Representatives is likely to vote in May on the bipartisan bill to repeal the stringent financial laws which were introduced during the financial crisis of 2008-2009.

The bipartisan bill will enable banks with less than $250 billion in assets to skip yearly Federal Reserve stress tests for higher capital requirements. With this, dozens of regional banks will be exempt from submitting for Fed approval, a “living will”. Notably, Fed’s “living will” guideline provides rules about the liquidation of a bank upon failure without creating market turmoil.

Additionally, the bill enhanced the scope of qualified mortgages. The banks which extend 500 or fewer mortgages a year will exempt from reporting various home loan data to the regulator.

Our Top Picks

Strong earnings, massive tax cuts and solid economic data are likely to boost consumer spending in the coming months forcing the price level to go up. This may prompt the Fed to aggressively implement tight monetary policy. Higher interest rate will eventually aid the banking industry.

We narrowed down our choice on five banking stocks with a Zacks Rank #1 (Strong Buy) with solid growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chart below depicts price performance of our five picks year to date.

Comerica Inc. CMA is a Dallas, TX-based financial services company, which is strategically aligned by three business segments: The Business Bank, The Retail Bank, and Wealth Management.

Comerica has expected earnings growth of 40.3% for current year. The Zacks Consensus Estimate for the current year has improved by 4.4% over the last 30 days.

Northern Trust Corp. NTRS is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. The company is headquartered in Chicago.

Northern Trust has expected earnings growth of 34.2% for current year. The Zacks Consensus Estimate for the current year has improved by 5.2% over the last 30 days.

Commerce Bancshares Inc. CBSH is a regional bank holding company offering a full range of financial products to consumers and commercial customers including personal banking, lending, mortgage banking, wealth management, brokerage and capital markets services. The company is headquartered in Kansas City, MO.

Commerce Bancshares has expected earnings growth of 30% for current year. The Zacks Consensus Estimate for the current year has improved by 7.1% over the last 30 days.

Associated Banc-Corp ASB offers a full range of traditional banking services such as business banking, trust, asset management, and investment services, retail banking, private banking, Credit and debit cards, personal loans, discount and online investment brokerage and several other financial activities.  The company is headquartered in Green Bay, WI.

Associated Banc-Corp has expected earnings growth of 26.3% for current year. The Zacks Consensus Estimate for the current year has improved by 8.5% over the last 30 days.

Popular Inc. BPOP is a diversified, publicly owned bank holding company. The corporation’s principal subsidiary, Banco Popular de Puerto Rico, has one of the largest retail franchises in Puerto Rico.  The company is headquartered in Hato Rey, Puerto Rico.

Popular has expected earnings growth of 56.3% for current year. The Zacks Consensus Estimate for the current year has improved by 7.4% over the last 30 days.

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