Is Lumber Signaling a Slow Down?

Lumber is directly tied into economic performance.

Bullion.Directory precious metals analysis 2 March, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

Lumber has great significance when it comes to economic data, particularly its correlation with the ISM manufacturing PMI (see here). Recently, lumber had been flashing warning signals of a potential sell-off as price action challenged a long-standing ascending trend line that has held since the commodity bottomed in 2009. 

Last week, lumber prices closed below this important trend line, and this could be an important inflection point for both lumber and US manufacturing data. The ISM manufacturing PMI came out today at 52.9, falling below expectations of 53. However, this marks the fourth consecutive contraction in the monthly print, following a “double-top” print of 59 in September and November of last year.

So far, lumber has been supported near $294.60, but further weakness in US manufacturing will unlikely provide any substantial upward movement. Price action will likely find it challenging to regain the might ascending channel. The medium-term downward trend, starting from December 2014, while combined with $310 price resistance could cap lumber prices without a catalyst.

What is most troubling is the rapid deterioration of new orders, first mentioned by Markit. New orders, 30 percent of the ISM manufacturing composite, has essentially collapsed from a December 2014 high of 66 to a current print of 52.5. Employment, 20 percent of the composite, has fallen from 56.8 in January to 51.4, currently. Although, employment is rather volatile.

To complete the tri-fecta, manufacturing prices have cratered from October’s reading of 59.5 to 35. Prices have fallen four of the last five months with this month’s print mirroring last month’s reading. Deflationary pressures will be exacerbated by the stronger dollar in the near-term.

Lumber is also highly correlated to the housing sector, which rot is beginning to set. Look out for this weeks follow up on lumber and US housing.

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