1 big thing: Jerome Powell is living rent-free in my head

Illustration of Jerome Powell using psychic powers.

2. Catch up quick

3. The financialization of watches

4. Pic du jour: Retreating!

Hi! It's Emily. I've been waiting all week for today's email, which features Matt's quest for a new kitchen, a photo of the Markets team (we couldn't get Neil in the pic!), and, oh yes, all the biz and econ news you need to start your Friday. Let's go!

🎧 Situational awareness: Axios' "How It Happened" podcast has a new episode examining the fight for the Donbas in Ukraine, through the eyes of both a journalist and a soldier.

Today's newsletter, edited by Kate Marino, is 876 words, 3.5 minutes.

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Stay on top of the latest market trends and economic insights

Axios Markets

1 big thing: The Fed ate the housing boom 

2. Chart:  New housing backlog builds  

3. Catch up quick

4. Jobs strength

5. 🛒 Everyone loves groceries 

Good morning everyone. It's Emily. We're here with the latest on housing and jobs today, as ever. But what happened yesterday in Texas is weighing on my mind — and my heart. Sometimes there are no words.

Today's newsletter is 954 words, 4 minutes.

1 big thing: Workers' leverage is here to stay

Illustration of a large fist made up of many smaller fists.   

3. 😭 Stonks. Ouch. 

4. Still bottlenecking

😎 👋 Greetings from sunny Washington, D.C., where your friendly Markets team is on retreat with hundreds of other Axios peeps. 

So, we offer you a newsletter that's (hopefully) still smart but has more brevity than usual. We are busy chatting and brainstorming ideas to keep you informed and entertained throughout the year! Send us your ideas by replying to this email. 

Today's edition, edited by Kate Marino, is 845 words, 3.5 minutes.

1 big thing: Workers with disabilities struggle to find jobs

3. Another borrower squeeze 

4. Bond market warning signals

5. Axios Harris Poll 100: Brands poisoned by politics

😎 Rise and shine Markets friends! It's Tuesday and, with some inspiration from British Prime Minister Boris Johnson, we're looking forward to walking downstairs to the fridge, and hacking off a small piece of cheese for a snack. 

Today's newsletter, edited by Kate Marino, is 1,096 words, 4.5 minutes.

1 big thing: Shrinking growth forecasts

Illustration of a pair of hands holding binoculars 

3. Remote work drove home price surge — report 

4. Charted: 🐶 Memecoins!

Morning. It's Matt. The Fed's trying to slow the economy, and guess what? It seems like the economy is slowing. Also, quantifying the impact of WFH on home prices. Plus, dogecoin and Shiba for crypto-lolz. Happy Monday! 

Today's newsletter, edited by Kate Marino, is 1,025 words, 4 minutes.

The euro is dropping fast against the dollar, an indication that markets see growing risks that Russia could curtail natural gas flows to the continent, hammering economic growth.

Driving the news: European benchmark natural gas prices spiked in the last week, on increased chatter that Russia would restrict gas flows, in what would be a crippling blow to Europe's economy. 

The big picture: Currency movements are driven, to a large extent, by what central banks are expected to do with interest rates. Hikes tend to strengthen a currency, while cuts weaken it.

The bottom line: The euro's drop against the greenback suggests investors think the Fed will follow through on its plans for aggressive rate hikes this year, because the U.S. economy will remain strong, and inflation high.

And despite statements from European Central Bank officials that the hiking cycle will start in July, the markets don't think Europe's economy will be strong enough for rates to rise much — perhaps because Russia will cut off energy supplies.      

The silver lining: If Americans can afford the airfare (that's a big if), Europe might be a relatively affordable vacation spot this year. 

Euro plummets toward parity with U.S. dollar

Energy jitters on the continent are driving the moves.

Currencies

A chart showing how many U.S. dollars 1 euro will buy

The euro is dropping fast against the dollar, an indication that markets see growing risks that Russia could curtail natural gas flows to the continent, hammering economic growth.Driving the news: European benchmark natural <a class="gtmContentClick" data-vars-link-text="gas prices spiked in the last week" data-vars-click-url="https://www.ft.com/content/d5e42eae-2387-4893-ab4e-7b58478f23e0" data-vars-item="in_content_link" href="https://www.ft.com/content/d5e42eae-2387-4893-ab4e-7b58478f23e0" target="_blank">gas prices spiked in the last week</a>, on increased chatter that Russia would restrict gas flows, in what would be a crippling blow to Europe&#x27;s economy.

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

The once-giddy mood among homebuilders, a side effect of the COVID-era housing boom, is ebbing in as mortgage rates surge.

Driving the news: The National Association of Home Builders' measure of confidence among builders of single-family homes fell for the fifth-straight month, near a two-year low.

Separate gauges measuring sales expectations over the next six months and traffic of potential buyers also fell sharply.

Why it matters: The drop reflects how the Fed's push to lift rates is quickly changing the economic terrain for companies and consumers alike.

Mortgage rates — heavily influenced by expectations for what the Fed will do with interest rates — have soared to more than 5.25%, from roughly 3%, for a 30-year fixed-rate loan.

The rise — along with a roughly 20% rise in home prices over the last year — has drastically reduced affordability.

What they're saying: "The surge in rates is clearly choking off the flow of would-be new buyers," wrote Ian Shepherdson, chief economist at Pantheon Economics.

The bottom line: The Fed is trying to slow the breakneck pace of rising house prices, and homebuilders are clearly getting a bit jittery about a potential slowdown — but their mood, at least by recent standards, remains quite elevated.

Homebuilders starting to feel higher mortgage rates

Homebuilders are getting a bit jittery about a potential slowdown.

Housing

Lumber at the site of a house under construction in Antioch, California.

The once-giddy mood among homebuilders, a side effect of the COVID-era housing boom, is ebbing in as mortgage rates surge.Driving the news: The National Association of Home Builders&#x27; measure of confidence among builders of single-family homes fell for the fifth-straight month, near a two-year low.

I should have pulled the trigger when I had the chance. Not long ago, I was feeling flush, and toying with the idea of transforming my recent stock market gains into something my family sorely needed: an eat-in kitchen. 

Why it matters: Aside from my personal quest to calmly stir mac-and-cheese while chatting with my wife and five-year-old daughter, our will-they-or-won't-they renovation drama shows how Fed rate hikes turn human psychology into a tool of monetary policy. 

State of play: Just a couple months ago, the financial logic for a renovation was clear and compelling.  

After 20 years of obsessively maxing out my 401(k) contributions — and about two years in which the stock market basically doubled  — I was overcome by an odd sensation I'd never before encountered: confidence in my retirement. 

Meanwhile, low interest rates would make the borrowing costs for the project pretty affordable. 

And superheated home values where we live — Westchester County, just north of New York City — likely made sinking a bit of cash into our circa-1940 Cape Cod-style cottage the best investment I could make. 

Context: We love the place, but it has a tiny, somewhat bizarre kitchen. For example, to maximize space, a previous owner mounted and framed the microwave in the wall, like some sort of mixed media art installation. (Its weirdness probably turned off other buyers, and helped us get the house. But it's a never-ending irritant.)  

The intrigue: As has become abundantly clear recently, all the factors I mentioned above — the home price boom, the low borrowing costs, the soaring stock market — were side effects of one simple fact: Money was remarkably cheap, thanks to the Fed.

That's changing. Since March, the Fed has raised interest rates twice, and talked tough about more hikes to come. And just like that, all the solid economic underpinnings of my plan have gone wobbly.  

Borrowing costs have surged — just look at the 30-year mortgage rate, at 5.25% compared to sub-3% for much of last year. 

The housing market seems like it may start to slow. 

The stock market has buckled. With the S&P 500 down by roughly 19%, my 401(k) doesn't inspire quite as much optimism as it used to. 

How it works: My experience is a pretty clear example of what economists call the wealth effect. 

When the value of assets — like stocks and houses — goes up, it can spur additional investment, and consumption. 

This chain is part of the way the Fed's interest rates influence the people leading households, companies and large institutions. 

It's not an exaggeration to say that Jerome Powell gets in their heads and changes their psychology, and by extension, the economy.   

Yes, but: There's a valid criticism that because the wealth channel is an effective way of influencing the economy, it's led the Fed to focus too much on keeping stock prices and home values up. And since stocks and homes are owned by the richer part of American society, this has worsened wealth inequality in recent years. 

On the other hand: It's also helped lower the unemployment rate, which benefits a broad range of Americans. 

The bottom line: The fate of our eat-in kitchen hangs very much in the balance at the moment. We're not giving up on the idea. 

But we're not making a big push to get it done soon. So our family will be demanding less lumber, tile, wiring and labor than we might have if Powell and his pals hadn't started lifting rates. And that's exactly what they wanted.  

Jerome Powell is living rent free in my head

I planned to renovate my kitchen. Then the Fed started raising rates.

Photo Illustration: Lindsey Bailey/Axios. Photo: Win McNamee via Getty Images

Economy

Top Stories

I should have pulled the trigger when I had the chance. Not long ago, I was feeling flush, and toying with the idea of transforming my recent stock market gains into something my family sorely needed: an eat-in kitchen. Why it matters: Aside from my personal quest to calmly stir mac-and-cheese while chatting with my wife and five-year-old daughter, our will-they-or-won&#x27;t-they renovation drama shows how Fed rate hikes turn human psychology into a tool of monetary policy.

Some are warning that the Federal Reserve's effort to slow inflation could potentially return the U.S. economy to the unusual condition it found itself in during the 1970s and early 1980s: Stagflation. 

The big picture: Despite high inflation, the U.S. economy is humming along — with unemployment at 3.6% in April —near the low levels that last prevailed in the late 1960s. 

Stagflation describes a highly unusual economic state of affairs when the economy is weak or stagnating — with high or rising unemployment — yet inflation is also elevated.

This is the opposite of what usually happens. 

High inflation tends to break out when economic growth is really roaring. 

Periods of weak economic growth, and rising joblessness, are typically accompanied by slow price increases, or even falling prices.

While the annual pace of price increases have surged to 40-year highs in recent months, unemployment is incredibly low.  This is an inflationary environment, not stagflation.  

When's the last time we had stagflation? 

The best-known stagflationary episodes hit the U.S. in the 1970s and early 1980s, when a series of oil shocks — especially the 1973 embargo that Arab members of OPEC placed on the United States in response for military support of Israel — sent fuel costs and inflation surging, as unemployment simultaneously shot higher. 

The combination of energy shocks and stagflationary conditions lasted on and off  into the early years of the Reagan administration. As late as 1982, unemployment was hovering around 10% and prices were rising as much as 6% annually. 

A number of economic policy bigwigs — former Federal Reserve chairman Ben Bernanke, current Fed chair Jerome Powell and Treasury secretary Janet Yellen (who also led the Fed) — have recently either implicitly or explicitly suggested that as the Fed tries to bring down inflation, unemployment will likely rise. 

That will likely mean we'll have an economy that is sort of stagflationary, at least for some period of time. In other words, growth will be weakening, but inflation will still be high.

Treasury Secretary Janet Yellen on Wednesday: "The economic outlook globally is challenging, and uncertain, and higher food and energy prices are having stagflationary effects, namely, depressing output and spending and raising inflation all around the world."

Bernanke in a New York Times article published this week: ''Even under the benign scenario, we should have a slowing economy ... And inflation's still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high,'' he predicted. ''So you could call that stagflation."

Powell told the Wall Street Journal this week: "I would say there could be some pain involved in restoring price stability."

What can Biden do about stagflation if it actually occurs?

Not much that wouldn't be politically unpalatable. 

Biden could propose a sharp reduction in federal deficit spending. That could help reduce inflation, but it would likely hurt growth and raise unemployment. 

He could attempt the kind of wage and price controls that President Nixon imposed in 1971, though that seems extremely unlikely and not particularly effective. 

He could basically let the Fed deal with it. That's essentially the path Jimmy Carter took in the late 1970s. The soaring Fed rate hikes and the deep recession that followed contributed mightily to his annihilation in the 1980 presidential election.  

The bottom line: Like we said above, we don't yet have stagflation. It's possible that the Fed is able to thread the needle so perfectly that inflation comes down easily and unemployment raises ever so slightly and nobody notices. 

But stagflation is a possibility, and an unappealing one for practically everyone. 

What stagflation means and what Biden could do about it

High inflation tends to break out when economic growth is really roaring.

Illustration of a dollar sign covered in cracks with pieces of tape over the cracks.

Stagflation

Jobs

Stock market

Some are warning that the Federal Reserve&#x27;s effort to slow inflation could potentially return the U.S. economy to the unusual condition it found itself in during the 1970s and early 1980s: <a class="gtmContentClick" data-vars-link-text="Stagflation" data-vars-click-url="https://www.axios.com/2022/02/25/ukraine-could-turn-boomflation-into-stagflation" data-vars-content-id="9124fd96-b71d-4b7d-8ad3-9a5f0e228cd1" data-vars-headline="What stagflation means and what Biden could do about it" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/02/25/ukraine-could-turn-boomflation-into-stagflation" target="_self">Stagflation</a>. The big picture: Despite high inflation, the U.S. economy is humming along — with <a class="gtmContentClick" data-vars-link-text="unemployment at 3.6% in April" data-vars-click-url="https://www.axios.com/2022/05/06/jobs-report-april" data-vars-content-id="9124fd96-b71d-4b7d-8ad3-9a5f0e228cd1" data-vars-headline="What stagflation means and what Biden could do about it" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/05/06/jobs-report-april" target="_self">unemployment at 3.6% in April</a> —near the low levels that last prevailed in the late 1960s.

China's lockdowns continue to punish the world's second-largest economy, with a fresh round of data suggesting a worsening outlook for growth.

Why it matters: China is the single largest contributor to world growth, so its slowdown will ripple out in the form of lower economic activity and corporate profits worldwide.

Driving the news: New data out Monday showed retail sales activity collapsed in April, with unemployment rising and exports and industrial production slowing sharply. 

Retail sales fell 11.1% in April, compared to the prior year, with considerable declines in major categories like restaurant spending and auto sales (a total of zero vehicles were sold in Shanghai).

China's surveyed unemployment rate rose to 6.1%, just shy of the high of 6.2% reported during the early days of the COVID outbreak in 2020. 

Industrial and export activity decelerated to 4% and 3.9%, as lockdowns in key industrial hubs such as the Yangtze River delta — home to Shanghai — took their toll.      

The bottom line: "The April activity data shows that the temporary disruption from the zero-COVID policy is more severe than expected, raising significant downside risk," JPMorgan analysts wrote in a research note. 

China's latest economic data shows lockdown's toll

New data shows retail sales activity collapsed in April.

China economy

Security personnel wearing personal protective equipment (PPE) man the entrance to a residential area on lockdown.

China&#x27;s lockdowns continue to punish the world&#x27;s second-largest economy, with a fresh round of data suggesting a worsening outlook for growth.Why it matters: China is the single largest contributor to world growth, so its slowdown will ripple out in the form of lower economic activity and corporate profits worldwide.

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Stories

Jerome Powell is living rent free in my head

What stagflation means and what Biden could do about it

Homebuilders starting to feel higher mortgage rates

China's latest economic data shows lockdown's toll

Euro plummets toward parity with U.S. dollar

Newsletter editions

Housing frenzy is over

"Ghosting and silence"

⚠️ Tapping the brakes

💰 Head games

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