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There is a substantial risk of loss in trading futures and options.

Past performance is not indicative of future results

Lumber was the first to crack, will other commodities follow?

Today’s hotter-than-expected CPI report, and the commodity rallies that have developed in the weeks before the release, felt like capitulation. New money had been making its way into commodities from unconventional sources; mom and pop investors trying to hedge the inflation they have been reading and hearing about. As a result, commodity ETFs which pool investor money to buy futures contracts, have been the source of a steady flow of buying into commodity markets that otherwise don’t see the action. Of course, it is also easier for the average retail traders to gain access to commodity futures today than it has been at any time in the past, so there has also been direct buying on a larger scale than the futures markets generally see. The investors’ desire to allocate money to commodities to curb inflation in a portfolio was exacerbated by the price of lumber which had rallied from under $300 per board foot to prices above $1,700! In my view, exploding lumber and copper prices triggered FOMO buying in commodities without regard to price that is more typical of cryptocurrency speculation.

However, the inflation narrative might be flawed and the reaction to it was likely overdone. We won’t know for sure until later in the summer, but we believe we could be amid “peak inflation” (at least for this particular cycle). Last week we wrote about the tendency for commodity rallies to be swift but temporary and we continue to believe high commodity prices will lure supply to the market to result in normalized pricing. Naturally, CPI is a lagging indicator; just as this month we are finally seeing the inflation we all knew was there show up in the data, we won’t see any price softening that could happen in the commodity markets in the CPI figure until later down the road. In short, the CPI is telling us what has already happened not what will happen going forward.

The two commodities garnering (no pun intended, my last name happens to be Garner) the most attention by inflation hawks are lumber and copper. As a reminder, the lumber market is one of the thinner commodity markets. In fact, it is so thin only a few hundred contracts trade in the front month on a normal day. Further, the lack of liquidity and volatile nature of the market creates a market prone to locked limit trading days. This occurs when the price change has reached the exchange’s maximum allowable price fluctuation for the day. In the early part of May, limit-up moves were common but this week we have seen a dramatic shift in sentiment causing prices to trade limit-down in all three of this week’s sessions. Although lumber is a great way to drive the fear of inflation, it probably isn’t the commodity that should be used as a gauge. After all, thin trading volume in lumber futures suggests cash market producers and users aren’t disciplined hedgers. In other words, if you want to imagine a world without liquid futures markets, look at lumber. Remember this the next time politicians put down speculation and suggest a financial transaction tax.


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If you want to play lumber, my advice is don’t do it. The most reasonable way might be to find highly correlated commodities with less volatility and more liquidity to trade as an indirect way to gain lumber exposure. Some examples might be the Canadian dollar, copper, the Dow, coffee, sugar, soybeans, and corn. I’ve noticed each of these markets is positively correlated to lumber 90% or more of the time. These strong correlations also tell us there is too much correlation among various commodities which could be a sign of froth.

With the lumber rally finally cracking, we might see other commodities follow suit. Copper prices haven’t suffered the same fate as lumber, but the rally has stalled and that is the first step toward normalization. We are seeing similar stagnant price action in other commodities such as grains and even crude oil. If lumber truly was the leader, as it appears, this could be the beginning of the end of the inflation trade.


Keep an eye on the US dollar. The dollar index futures quietly held support this morning and could be in the early stages of squeezing the overcrowded short dollar position. As history teaches us, a stronger dollar acts as a headwind to risk assets. If the dollar makes its way to the resistance side of the trading range the talk of the town could be deflation, rather than inflation.

*There is substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results.

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Seasonality is already factored into current prices, any references to such does not indicate future market action.

There is substantial risk of loss in trading futures and options.

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