Things got a bit too spicy for Hormel

Stocks rose yesterday after a Fed official hinted that things are moving in the right direction. Consumers were more optimistic this month than last, but they are still dubious on the future.

Just say the word. Yesterday, Fed Governor Christopher Waller gave a speech, as Fed governors do, to keep busy in between meetings… and to jawbone the markets… and to practice for future political appointments . You might have caught his speech, but if you didn’t have the time, all you needed to know was the title of his prepared comments, which was “Something Appears to Be Giving.” Now it doesn’t take a Doctorate in Finance to know that his use of the word “giving” was not referring to the Holiday Spirit. If you guessed that his remarks included something about the Fed’s rate hiking having the desired effect on inflation, you get the prize. While the voting FOMC member left the door open for more rate hikes if needed, he was clearly more focused on what comes after success. He saw inflation falling, an economy restricted, reduced consumption, and a slackening labor market. In other words, the beginnings of a central banker’s dream. That, my friends, is the sound of a known hawk flirting with doves. And Waller is not the only one, though the comments from him are probably one of the highest on the flirting-with-doves scale to date. The market certainly didn’t miss the hint, and Treasury yields declined while stocks rallied. ALSO, gold surged, crude ascended, and the dollar dropped. WAIT… what was all that in the last sentence? Gold, Crude… the Greenback??

Indeed, my friends. Now pay attention. There is something known as Interest Rate Parity in international economics circles. I am going to oversimplify the already simple concept and explain. If you have two countries and one country has higher local bond yields than the other, investors will shift their investment dollars to the higher interest rate country’s bonds. Makes sense so far, right? Who doesn’t want more yield? As those countries only offer bonds in their local currency, foreign investors must first convert into the local currency in order to buy the bonds. In doing so, the currency from the lower-yield country goes down and the currency from the higher-yield country goes up. Ultimately, this causes a state of parity in which there is no net benefit from the shift, as the higher-rate bonds will cost more when factoring in the exchange rate increase. You don’t have to re-read that. All you need to know is that when a country experiences big moves in sovereign bond yields relative to another country, currency exchange rates adjust. When yields are expected to go higher, the currency rallies, and vice versa, when yields are expected to decline, so does the currency. Don’t believe me? Check out this chart that shows 10-year Treasury Yields (blue line) moving in lockstep with the Dollar Spot Index (white line).

As Treasury yields have declined, so has the dollar. That move was accentuated yesterday after Waller’s comments. Now pay close attention to these next few bits of information. In case you didn’t know, crude oil and gold are largely transacted in… wait for it… wait for it… the US Dollar. Let’s not get into the whys and how other industrialized countries hate it… for now it’s just… facts. That said, and now that you know the dollar is losing value, you may have concluded that crude oil and gold are technically cheaper for foreign investors. Wouldn’t you know it, as the dollar fell yesterday, gold jumped along with crude oil. More Parity, and all it took was a few kind words from some guy you probably never even heard of before today!! Finally, it is important to remember that these adjustments to parity are just that, adjustments. Once adjusted the arbitrage closes and there are no guarantees that trend will continue. In other words, the dollar may not continue to fall, gold may not resume its rally, and crude may not edge higher yet. At least not in response to yield disparity. Now you know!

EARLY MORNING MOVERS

Hormel Foods Corp (HRL) shares are lower by -2.38% in the premarket after it announced a wide EPS miss along with a negative surprise in Revenues. Hormel’s forward PE of 19.15x is lower than the Median 21.79x PE of its peers. The company provided full-year guidance in line with analysts’ estimates. Dividend yield 3.53%. Potential average analyst target upside: +7.2%.

General Motors Co (GM) shares are higher by +9.03% in the premarket after it provided full-year guidance to investors. The company also announced a +33% dividend hike for 2024 and an accelerated stock buyback program. Investors like that! Dividend yield: 1.24%. Potential average analyst target upside: +52.0%.

YESTERDAY’S MARKETS

NEXT UP

• Annualized Quarterly GDP (Q3) is expected to come in at +5.0%, which is an upward revision from the earlier +4.9% gain.
• Federal Reserve Beige Book will be released this afternoon. It contains anecdotal information from the various Fed regions, and it is prepared to be used by the FOMC in its deliberations. That means, an FOMC is coming soon… and it is on December 12^th and 13^th.
• Earnings after the closing bell: Nutanix, Snowflake, Synopsys, Five Below, Pure Storage, Victoria’s Secret, Salesforce, and PVH.