Lumber Price Forecast: Rips May Fall Short as Fed-Induced Mortgage Rate Surge Chops Prices
Lumber, Federal Reserve, Mortgage Rates, Housing Starts, Recession Risks - Talking Points
- Lumber prices have established a multi-week downtrend as mortgage rates surge
- The Fed’s path forward looks aggressive enough to stifle the US housing market
- Housing starts and building permits in focus as recession indicators trigger worry
US Lumber prices have shifted lower over the past month of trading. That slide came amid a broader rally in commodities as Western sanctions on Russia inflamed global supply lines that were just starting to recover following the Covid pandemic. However, the United States imports the large bulk of its lumber from Canada. It produces the rest. This leaves factors more central to the domestic US market at play.
The aggressive shift in Federal Reserve rate hike bets has been a key factor at play here. The Fed already raised rates this year, but now markets are expecting a 50-basis point hike next month. Moreover, policymakers may reduce the balance sheet at a faster clip than previously thought. This has caused mortgage rates to surge. Higher rates make borrowing money more expensive, in turn reducing demand.
US housing starts rose in February, but building permits fell over the same period, according to data from the US Census Bureau and the US Department of Housing and Urban Development. The housing market may be taking its final breath here, with buyers racing to lock in rapidly rising mortgage rates. The net report on those figures will cross the wires on April 19.
Analysts expect a month-over-month change of -1.3% on building permits and -1.6 % for housing starts, according to a Bloomberg survey. The downbeat outlook bodes poorly for the lumber market. A worse-than-expected set of data may accelerate the decline in prices. Additional hawkish commentary from Fed members would reinforce the bear case further. Moreover, the recent yield curve inversions are triggering recession worries.
Housing demand typically plummets during recessions. Along with the threat of higher mortgage rates, a possible recession, as indicated by yield curve inversions, will likely weigh on lumber sentiment. Major home builders may begin to trim their orders at a more rapid pace over the coming months. Altogether, the path of least resistance for prices appears to be to the downside. Relief rallies are almost inevitable during a downtrend, but those rebounds are likely to be seen as selling opportunities along the way.
--- Written by Thomas Westwater, Analyst for DailyFX.com
To contact Thomas, use the comments section below or @FxWestwater on Twitter
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.