10% Drop in Lumber Is A Poor Framework For Stocks

Over the last month, lumber prices have fallen by 10%.  Over the last five years, lumber has been an interesting early warning sign for deflation concerns.  Because lumber is tied to housing and housing to inflation, swings in lumber tend to lead swings in inflation expectations,  While the Fed has been working hard to reflate the US economy, swings in inflation expectations have tended to lead movements in stocks.  So, now, with lumber prices correcting and inflation expectations (using the 10 year US Treasury nominal and TIPS yields) falling, stocks are vulnerable to perceptions of a possible deflationary relapse.