LEONARD LUMBER REPORT: The market sold off over $30 last week on very light volume
Weekly Recap:
The market sold off over $30 last week on very light volume. The futures market is being pulled toward the cash price with help from the funds and algorithms. The low volume could signal a bottom forming. Bottoms take time, and new lows are often made before it happens. The industry is searching for reasons for improvement, which is slowing any selling when hedging should be in place. This keeps focus on their cash and not futures for help.
The funds added another 538, totaling 3, 3847. When the funds go short, the spread becomes defined, and that excites speculators. The chatter from now until October 15th will revolve around the spread. Usually, at this time of year, I expect the spread to move $10 while futures rally $50. But as they say, ” when in Rome….
“We heard from builder Lennar last week and will get more updates soon. I’m not revealing anything new; builders are pulling back, waiting for a shift in the rate environment. This is somewhat positive. Less building means less supply. I included a mortgage chart below. We saw a 6.19% rate last week before it climbed again on Friday. I’ve mentioned the yield curve dynamics before. The rate increase on Friday is concerning, but the trend has shifted. Will this change manifest at the desired pace? Probably not, but you can’t expect more lows if the trend has shifted. Rates are key. It might be time to break below 6%. You can cut production, but that might only lead to new lows. Conversely, a slight demand increase could generate momentum.
The biggest hurdle in our industry is the potential rise in unemployment. The latest claims figures and revisions from the previous week show a stable unemployment rate, which is a relief. Two reasons support steady employment: first, the substantial amount of capital injected into the system, which has not yet been spent; and second, the BBB, which will add capital. Both factors will keep corporate profits high and employment steady. While this isn’t positive for housing, it does ease one major headwind.
The funds added another 538 to 3847. When the funds get short, the spread has a definition, and that gets the specs fired up. The chatter from now until Oct 15th will be about the spread. At this time of year, I would bet that the spread moves $10 while the futures rally $50. But when in Rome….
We saw builder Lennar’s earnings last week and will hear more in the next few weeks. I’m not telling you anything you have not been told already. The builders are pulling back, waiting for the rate dynamic to change. That is mildly friendly. Build less and you see less. I included a mortgage chart below. We did see a 6.19% number last week before it turned back up on Friday. I have mentioned the yield curve dynamics in the past. The turn up of rates on Friday is troubling, but the worm has changed. Will that change show up at the pace we want? No, but you can’t look for more lows if things have changed. Rates are the key. It could be a time for a break of 6%. You can cut all the production you want, only to see new lows. On the other hand, only a slight demand increase will create momentum.
The biggest headwind in our industry is a possible bump in unemployment. The last claims number and the revision of the previous week show a flat unemployment environment. That was a relief. There are two reasons for steady employment. The first is the extraordinary amount of capital that was pushed into the system. It hasn’t all been spent yet. The other is the BBB. It will add capital to the system. Both will keep corporate profits higher and employment flat. That’s not a positive for housing, but eases one headwind.
Daily Bulletin:
https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf
Southern Yellow Pine:
https://www.cmegroup.com/markets/agriculture/lumber-and-softs/southern-yellow-pine.volume.html
The Commitment of Traders:
https://www.cftc.gov/dea/futures/other_lf.htm