Get Ready For Higher Interest Rates

Back in June, I showed how lumber prices give a leading indication for short term interest rates, and offered that as proof the double-dip was coming.  Now that we have seen the expected dip in rates, it is time to reexamine this relationship and look at what lies ahead. 

To create this chart, I loaded lumber prices and interest rates into a spreadsheet, then selected chart ranges which are not side by side. There is a time offset involved, shifting lumber prices forward to reveal the leading indication they give for interest rates.  I used the 6-month LIBOR here; LIBOR stands for London InterBank Offered Rate, and it is a reference rate for the interest that banks charge each other.  One could use just about any data series for short term interest rates and see the same effects.

Lumber prices bottomed in late January 2009, and the 6-month LIBOR initially bottomed in mid-February 2010, just about exactly one year later.  Lumber prices made a failing rally off of that January 2009 bottom, shown as a "false breakout" on the chart, and then came back down to make a double bottom.  We are seeing right now that the LIBOR is making its own double bottom as the echo of what lumber prices did a year before.

Now we see that interest rates have reached the point in time that equates to when lumber prices started their big rally.  Thus, we should expect that short term interest rates are going to rise into early 2011, whether or not the various members of the FOMC believe it.  Rate hikes are like watching a batch of popcorn starting to pop.  First one goes, then another, and before long the whole batch is popping.  China's quarter point rate hike in October 2010 may be the first kernel to pop in the coming wave of short term rate hikes.