Logan Mohtashami: Decoding the Jobs Report and Its Market Tremors

Logan Mohtashami, Lead Analyst at HousingWire, suggests that while political calls for Federal Reserve rate cuts are growing louder, the true signals for the Fed's next move lie within specific labor data, particularly residential construction employment, and the bond market's response to key 10-year yield thresholds. He paints a nuanced economic picture where surprising resilience in some housing market indicators contrasts sharply with underlying caution from homebuilders, urging investors to look beyond superficial headlines.

Key Insights

The 10-Year Yield's Litmus Test: Why 4.35% is Logan Mohtashami's Line in the Sand

Attribution: Logan Mohtashami

"435 is for me, this year is key in terms of 435 to 470 is the upper range for my forecast. If the economy's progressing forward fine, that's an acceptable range... when we start going lower than 435 and then, you know, if it ever hits the hoarder line again, hoarder line is 380. The market is really pressing weakness, right?"

Logan Mohtashami outlines a clear framework for interpreting the 10-year Treasury yield as a barometer of economic health and market expectations. He identifies the 4.35% to 4.70% range as indicative of an economy progressing normally. However, a sustained drop below 4.35% signals that the bond market is pricing in significant economic weakness and likely anticipating a more accommodative stance from the Federal Reserve. An even more critical level is what Mohtashami terms the "hoarder line" at 3.80%, a breach of which would suggest the market is aggressively signaling distress and a high probability of recession.

This analytical lens is crucial because the bond market often anticipates economic shifts before they are broadly acknowledged. At the time of the discussion, the 10-year yield was hovering around 4.37%, placing it just above this critical lower bound. Mohtashami notes that recent weak data, like the ADP report miss and concerning ISM new orders, had already pushed yields down towards this level.

Actionable Takeaway for Investors: Investors should closely monitor these specific 10-year yield levels. A sustained move below 4.35% could warrant a more defensive portfolio allocation, anticipating increased market volatility and a potential flight to safety. Conversely, yields remaining comfortably within the 4.35%-4.70% range might suggest the economy is weathering current pressures better than feared.

Beyond the Headlines: Why Residential Construction Job Losses Are Logan Mohtashami's True Recession Canary

Attribution: Logan Mohtashami

"It's not the inverted yield curve that's giving you the recession. It's an inverted yield curve plus residential construction workers losing their jobs, which then tags the jobless claims data to a certain level to where you really start to talk about a recession."

Mohtashami consistently emphasizes that job losses in the residential construction sector are a more potent and reliable leading indicator of a recession than an inverted yield curve in isolation. His model posits that a recessionary trigger involves the combination of an inverted yield curve, significant job losses among residential construction workers, and a subsequent rise in broader jobless claims. He highlighted that two out of the four residential construction labor reports this year had already shown negative job growth. If the upcoming jobs report were to show another decline, it would mark the first instance of back-to-back negative reports, a development he views as a serious warning sign.

The logic is that residential construction is highly sensitive to interest rate hikes, which the Fed employs to cool the economy. As borrowing costs rise, construction activity slows, leading to layoffs in this sector first. These initial job losses then ripple through the economy. Mohtashami stressed this point, noting, "Residential construction workers is key... If it happens tomorrow, that'll be the first back to back negative reports we have."

Actionable Takeaway for Investors: Pay keen attention to the residential construction employment figures within the jobs report. Further sustained weakness in this specific area, especially consecutive negative prints, would lend significant weight to Mohtashami's recession model and could signal a broader economic downturn, prompting a shift towards more defensive assets.

The Fed's Dilemma: How Far Can Labor Bend Before Powell Breaks from His "Old and Slow" Stance?

Attribution: Logan Mohtashami

"If job growth is trending below 133,000, that's the low point. That's a net negative. You got to wonder at what point does the Federal Reserve start leaking out that we're going to be a little bit more mindful because the hirings aren't that great."

Mohtashami characterizes the Federal Reserve as being "old and slow" to react, preferring to hold financial conditions tight until the labor market shows undeniable signs of cracking. Despite Fed Chair Jerome Powell admitting they were "a little bit late" in their policy response last year, Mohtashami anticipates a similar reluctance to pivot prematurely this cycle. He identifies a monthly job growth figure trending below 133,000 as a critical threshold that would represent a "net negative" for the labor market and could compel the Fed to signal a more dovish outlook.

Adding complexity is the evolving nature of labor force dynamics. With reduced immigration and an aging population, the breakeven point for job creation to keep the unemployment rate stable has fallen significantly, from around 160,000 last year to potentially as low as 50,000 now, according to some economists. This means the unemployment rate might not rise as sharply even with slowing job growth, potentially delaying a Fed response. Mohtashami also notes the increasing political pressure, or "playing the refs," from figures like former President Trump and investor Bill Pulte, who are vocally calling for rate cuts, especially if labor data weakens.

Actionable Takeaway for Investors: Monitor headline job creation relative to Mohtashami's 133,000 threshold and the lower 50,000 breakeven estimate. Significant undershoots, particularly if accompanied by any uptick in the unemployment rate (even a modest one given demographic shifts), could be the catalyst for a Fed policy shift, impacting asset prices across the board.

Housing Market Paradox: Logan Mohtashami on Why Strong Purchase Applications Don't Mean a Construction Boom

Attribution: Logan Mohtashami

"The new home sales sector just hit a multi year high in sales. But their purchase application data is at post Covid highs... But then you look at the builder stocks, they're not doing well. Permits are at recession level, starts at recession levels. What's going on here?"

Mohtashami points out a striking paradox in the housing market. On one hand, new home sales have reached multi-year highs, and their associated purchase application data is at post-COVID peaks. Similarly, purchase applications for existing homes have shown 18 consecutive weeks of positive year-over-year growth, with five of those weeks posting double-digit gains. This surface-level strength, however, masks underlying weakness. Builder stocks are underperforming, housing permits and starts are at recessionary levels, and builder confidence, especially among smaller builders, is near COVID-19 lows.

He explains this divergence by noting that large, publicly traded builders are adeptly managing their inventory, using incentives and rate buydowns to move product. "They're just kind of managing their sales," Mohtashami states, emphasizing that this is about selling existing or near-completed homes, not a surge in new construction. The strength in existing home purchase applications is attributed to working off an "extremely low bar" from the previous year and a normalization in new listings, as sellers are often subsequent buyers who fill out purchase applications.

Actionable Takeaway for Investors: Investors should be cautious about interpreting strong purchase application data as a sign of a robust, broad-based housing recovery. The lack of new construction activity and low builder confidence suggest that significant headwinds, primarily high interest rates and margin pressures, persist. Opportunities may lie with well-capitalized builders skilled in inventory management, but a widespread construction boom is unlikely without a more favorable economic and interest rate environment.

Insightful Quotes

• Logan Mohtashami on his recession model:

  "It's not the inverted yield curve that's giving you the recession. It's an inverted yield curve plus residential construction workers losing their jobs, which then tags the jobless claims data to a certain level to where you really start to talk about a recession."

• Logan Mohtashami on key 10-year yield levels:

  "435 is for me, this year is key in terms of 435 to 470 is the upper range for my forecast. If the economy's progressing forward fine, that's an acceptable range... when we start going lower than 435 and then, you know, if it ever hits the hoarder line again, hoarder line is 380. The market is really pressing weakness, right?"

• Logan Mohtashami on the Fed's trigger for a potential policy shift:

  "If job growth is trending below 133,000, that's the low point. That's a net negative. You got to wonder at what point does the Federal Reserve start leaking out that we're going to be a little bit more mindful because the hirings aren't that great."

Market Implications

Logan Mohtashami's analysis provides a detailed roadmap for navigating the current economic landscape, particularly in response to the jobs report. The interplay between labor market data, bond yields, and Federal Reserve policy will be crucial for investment strategy.

If upcoming jobs reports show weakness in residential construction employment and headline job growth falling towards or below the 133,000 threshold, investors should anticipate the 10-year yield testing levels below 4.35%. This would signal increasing recession probabilities and likely prompt a more dovish tone from the Fed, potentially benefiting fixed-income investments and rate-sensitive equities.

The housing market presents a mixed bag. While strong purchase application data might seem bullish, the underlying caution from builders and depressed levels of new permits and starts suggest that any recovery will be shallow and heavily dependent on significant interest rate relief. Investment opportunities might be found in select, well-capitalized homebuilders adept at managing inventory and margins, but broad-based optimism in the construction sector appears premature.

Ultimately, the Fed's reaction function remains the dominant variable. Mohtashami's framework suggests the Fed will be data-dependent but may exhibit a lag in its response until labor market deterioration is undeniable. This creates a period of uncertainty but also potential opportunities for investors who can correctly anticipate the Fed's pivot by closely watching the specific indicators Mohtashami highlights. Furthermore, he dismisses widespread fears that U.S. debt and deficits are the primary drivers of current bond yields, noting that if the bond market were truly panicked about fiscal sustainability, the 10-year yield would be significantly higher (e.g., 6-8%), not trending lower on signs of economic weakness. This suggests that economic cycle dynamics, rather than sovereign risk, are currently dictating bond market behavior.