A disastrous earnings report from Snap and less than inspiring results from Dow components American Express and Verizon weren’t enough to keep the Wall Street bulls at bay Friday. Stocks surged on hopes that the Federal Reserve may soon come to the rescue by slowing the pace of its rate hikes.

The Dow rose nearly 750 points, or 2.5%, even as AmEx (AXP) and Verizon (VZ) fell nearly 2% and 5% respectively. The Dow has now gained for the past three weeks, its longest weekly winning streak of the year.

It was a broad-based rally, with all sectors rallying. In fact, Verizon and AmEx were the only two Dow stocks that weren’t in green Friday. Blue chip stocks Exxon Mobil (XOM), health insurer Cigna (CI), Big Pharma stock Eli Lilly (LLY) and defense contractor Northrop Grumman (NOC) even hit new all-time highs.

Stocks opened lower but were quickly off to the races after a Wall Street Journal report indicated that even though the Fed is likely to raise rates by another three-quarters of a point in November, Fed members are debating whether to signal that a smaller hike could be in the cards in December.

Investors have started to become nervous that the Fed’s series of unprecedentedly large rate hikes could tip the economy into recession. And apparently some at the Fed are having doubts about the pace of rate increases as well.

Reuters reported that San Francisco Fed president Mary Daly said in a speech Friday that the central bank should not create an “unforced downturn” for the economy with too many massive rate hikes.

Long-term bond yields pulled back slightly, too, after the rate for the 10-year Treasury hit its highest level since late 2007.
Traders work on the floor of the New York Stock exchange during morning trading on October 18, 2022 in New York City.

Beware of fad stocks. Truly owner, Snap and Zoom have plunged

“The market has been looking forward to the Fed taking a break,” said JJ Kinahan, CEO of IG Group North America, which owns the online brokerage firm tastyworks.

“I think it’s the right call to let the rate hikes they’ve already done play though the system a bit and see what shakes out,” Kinahan added.

The Nasdaq and S&P 500 surged too, rising 2.3% and 2.4% respectively. All three major market indexes are now up about 5% for the week, their biggest gains since June, and have posted solid gains for the month of October.

That’s despite the fact that Snapchat’s parent company (SNAP) plunged nearly 30% following its earnings, news that sent shares of other social media companies spiraling downward as well. Facebook owner Meta fell more than 1% and Pinterest (PINS) sank 6%.

Twitter (TWTR) also fell nearly 5%, due to reports that the Biden administration may closely scrutinize Elon Musk’s other businesses for a national security reasons before allowing Musk to buy Twitter (TWTR). There were also reports suggesting massive layoffs ahead at Twitter (TWTR) if the Tesla (TSLA) and SpaceX CEO closes the deal.

The spectacle surrounding Liz Truss, who on Thursday secured her fate as the shortest-serving prime minister in UK history, has quickly given way to a frenetic race to determine who will replace her. Will it be former finance minister and her recent opponent, Rishi Sunak? Or predecessor Boris Johnson, who could engineer a stunning comeback?

But as the world watches the drama unfold, a grim reality lurks: Whoever steps into No. 10 Downing Street next will inherit an economic mess with no easy fixes.

The Bank of England believes the country may already be in recession, and the economic outlook is expected to get worse before it gets better, as high energy prices push households to curtail their spending.

A government report released Friday showed retail sales fell 1.4% in September, a worse-than-expected drop. Sale volumes are lower than they were before the pandemic. Consumer confidence is near its worst level on record as inflation sits at a 40-year high.
British Chancellor of the Exchequer Jeremy Hunt speaks at the House of Commons, in London, Britain, October 17, 2022.

The UK just stepped back from the brink. But there’s more trouble ahead

At the same time, investor concerns about the United Kingdom’s finances, which burst into the spotlight during Truss’ tenure, will make it difficult to unveil any stimulus beyond immediate support for energy bills.

“A key focus for the next Prime Minister and their chosen Chancellor needs to be fiscal responsibility,” Carl Emmerson, deputy director of the Institute for Fiscal Studies, said in a statement on Friday. “We need a credible plan to ensure that government debt can be expected to fall over the medium-term.”

Although one top Bank of England official indicated this week that investors may be pricing in too many interest rate hikes, the central bank is expected to remain tough in the near-term in its campaign to get prices under control.
An economy in recession

Economists agree that if the United Kingdom isn’t already in recession, one is likely to arrive soon. The country’s output shrank by 0.3% in August, following an expansion of just 0.1% in July.

Dean Turner, an economist at UBS Wealth Management, called the spending outlook “pretty grim, to say the least.” The main questions now, he said, are how long a contraction lasts and how deep it becomes.

The picture of the United Kingdom’s financial position also darkened with the release of fresh data on Friday showing that Britain’s government borrowed £20 billion ($22 billion) in September, £5.2 billion ($5.7 billion) more than the country’s fiscal watchdog had expected.

“The weakness in retail sales and overshoot of the Office for Budget Responsibility’s March public borrowing forecast won’t make the next Prime Minister’s task any easier in navigating the economy through the cost of living crisis, cost of borrowing crisis and the cost of credibility crisis,” Ruth Gregory, senior UK economist at Capital Economics, said in a note to clients.

The pound fell 1.4% against the US dollar on the heels of the gloomy reports, sinking below $1.11. It could continue to lose ground as the dollar pushes higher.
The cost of uncertainty

Truss has said the Conservative Party will install a new prime minister within a week. Despite questions about who it will be — and who will lead the Treasury under his or her leadership — investors and economists expect the revamped economic plan outlined by current finance minister Jeremy Hunt to remain intact.

On Monday, Hunt — just days into the job himself — announced the rollback of almost all tax cuts in Truss’ original “growth plan,” which had been rejected by investors. Citing a renewed commitment to controlling the country’s debts, Hunt also said the government will universally cap energy prices only until April. Support beyond then will cost taxpayers “significantly less than planned,” he added.

“Whoever becomes PM — and even if they decide to change the Chancellor — it seems to me that the fiscal path is pretty much set in stone, because the markets will not tolerate anything other than what’s on the table,” Turner said.

That could keep financial markets in check for the time being, though firm assurances and more detail on budget plans would be welcome at a time when bond markets around the world are showing signs of strain, said James Athey, investment director at Abrdn, an asset manager.

“It just again keeps the pause button pressed on international investor engagement,” Athey said.

There’s also some ambiguity about the Bank of England’s next moves. Ben Broadbent, deputy director of monetary policy, on Thursday warned that investors may have gotten too far ahead of themselves in projecting rate hikes amid the recent chaos.

“Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen,” he said in a speech.

The central bank is still expected to be very tough at its November and December meetings. If the economy slows sharply next year, it could later pull back. That said, if the government withdraws some support for energy bills in April, that could reignite inflationary pressures — once again complicating the calculus.

“Let’s be honest, we have no idea what the energy price will be in April, so we have no idea what the effect will be on household budgets,” Turner said.

That leaves investors guessing for longer, and economists waiting to revise their forecasts.

“Clarity and certainty, unfortunately, are all too absent,” Athey said.

It’s been a tumultuous year for retail traders — people who buy shares of individual companies or indexes on popular trading platforms like Robinhood or E-Trade. Facing an economic outlook full of bear markets, high inflation and interest rate hikes, they’ve finally decided that they’ve had enough.

What’s happening: Back in the spring of 2020, the world shut down because of Covid-19, and markets plummeted. But Americans, bored and stuck on their couches, turned to stocks as a source of entertainment. Using the stimulus money lining their pockets and taking advantage of new technology that made it easy and cheap to trade, they entered the markets. This new cash led to a quick stock rebound as well as the rise of meme stocks.

Daily average trades at companies like TD Ameritrade (AMTD) and Charles Schwab (SCHW) spiked to new highs in March 2020 and again in January 2021 and February 2021.

That’s no longer the case. The market downturn this year has knocked about $15 trillion off the valuations of publicly traded companies, and retail investors, once eager to buy the dip and save fledgling markets, are fleeing.

The average daily number of retail trades handled at Charles Schwab fell to 5.5 million in the third quarter, down from 6.2 million in the second quarter. The number of daily retail trades at Morgan Stanley fell more than 15% over the third quarter from a year earlier, to 805,000 trades a day.

In the first quarter of 2021, the height of the retail trade boom, Schwab reported 8.4 million daily average trades, while Morgan Stanley (MS) reported 1.6 million.

Order flow data from Robinhood and Interactive Brokers also show steep declines in activity over the past three months. In Februrary 2021, Interactive Brokers registered an average of 3.7 million daily retail trades. By September 2022, that number declined to 1.9 million, according to data collected by S&P Global Indices.

Recent search trends on Google also show a drop in interest in the stock market. Market-related searches reached their high in March of 2020 and remained high through 2021. But searches for terms related to the Dow Jones Industrial Average, Apple (AAPL) and Tesla (TSLA) have fallen in recent days. Those declines are a good proxy for actual market participation, said DataTrek Research in a report.

In general, individual investors are feeling bearish. The Investor Movement Index (IMX), created by TD Ameritrade to indicate the sentiment of retail investors, fell by 7.26% during the September period. The IMX sat above 8.0 in 2021, today it’s at just 4.5%.

Robinhood (HOOD), the app-based stock trading platform, has been cutting costs in response to a declining user base. The company announced in August that it would cut 23% of its full-time staff, the second cut this year.

“Last year, we staffed many of our operations functions under the assumption that the heightened retail engagement we had been seeing with the stock and crypto markets in the Covid era would persist into 2022,” Robinhood CEO Vlad Tenev wrote in a message to employees following the announcement. “In this new environment, we are operating with more staffing than appropriate.”

Shares of Charles Schwab have dropped by about 20% so far this year. Robinhood is down 47%, and Morgan Stanley is down 24%.

The bottom line: A loss of retailer investors is concerning for many reasons. One is that it could spell a longer, deeper market downturn. It also could mean that the heyday is over for meme stock fan favorites like AMC (AMC), GameStop (GME) and Bed Bath & Beyond (BBBY).

But don’t panic yet. “While activity is certainly a far cry from the meme stock rally, I’d say it’s holding up fairly well,” said Thomas Mason, senior analyst at S&P Global Market Intelligence. “Some are undoubtedly pulling out of the market and buying bonds, but it seems like retail investors are mostly taking a wait-and-see approach to equities, holding onto Big Tech stocks and rotating into more stable, dividend-paying sectors like energy.”
Goodbye Liz Truss, we hardly knew you

Kim Kardashian can officially say that her ill-fated 72-day marriage to Kris Humphries lasted longer than the tenure of British Prime Minister Liz Truss.

A revolt among members of Truss’ Conservative Party sealed her fate as the shortest-serving prime minister in Britain’s history on Thursday, reports my colleague Julia Horowitz.

But the failure of her fleeting leadership was really written by financial markets. Investors immediately protested her disastrous “growth plan” when it was revealed in September.

UK government bond yields rose at their fastest rate on record, sending borrowing costs surging, upending the country’s mortgage market and forcing the Bank of England to make three successive interventions to rescue overstretched pension funds.

Need more proof? Markets usually hate uncertainty. But on Thursday, they shrugged. UK bonds held their ground. The pound ticked up 0.4% to $1.125.

“Although the resignation of Liz Truss as Prime Minister leaves the UK without a leader when it faces huge economic, fiscal and financial market challenges, the markets appear to be relieved,” said Paul Dales, chief UK economist at Capital Economics.

Another Conservative leadership election is due to take place within a week, with the next prime minister expected to be announced on Friday, October 28. The UK will now see its fifth premier since the divisive 2016 Brexit referendum.
US home sales fall for the 8th month in a row

Home sales in the US declined for the eighth month in a row in September as surging mortgage rates and high prices pushed buyers out of the market, reports my colleague Anna Bahney.

That continues a slowing trend that began in February and marks the longest housing sales slump since October 2007 during the subprime mortgage collapse.

Sales of existing homes – which include single-family homes, townhomes, condominiums and co-ops – were down 23.8% in September from a year ago and down 1.5% from August, according to the National Association of Realtors.

Sales in September were at their weakest level since May 2020, which was an anomaly because that was in the early days of the pandemic lockdown. Setting that aside, sales last month were the weakest they have been since September 2012.

A fragmented market: The slowdown is manifesting differently in markets across the country.

In the West, sales have dropped the most dramatically, plunging 31.3% since last year. Meanwhile, home sales have dropped 18.7% from a year ago in the Northeast, 19.7% in the Midwest and 23.8% in the South.

“While we often talk about a national housing market, this is really the sum of trends in tens of thousands of local real estate markets across the country,” said Danielle Hale, chief economist at Realtor.com. “As the national market is at an inflection point, the range of local market conditions has grown wider.”

Apple’s industrial design chief who most recently oversaw the design of products including the iPhone, Apple Watch and Mac computers is leaving the company.

Evans Hankey was one of two people promoted to oversee the design team after the departure of Apple (AAPL)’s longtime product designer, Jony Ive, in June 2019. Apple (AAPL) told CNN that Hankey will remain at the company for a temporary period.

“Apple’s design team brings together expert creatives from around the world and across many disciplines to imagine products that are undeniably Apple,” a spokesperson said. “The senior design team has strong leaders with decades of experience. Evans plans to stay on as we work through the transition, and we’d like to thank her for her leadership and contributions.”

The departure, which was first reported by Bloomberg, comes at a time when many of Apple’s best-known products are mostly receiving incremental design updates while long-rumored products such as a mixed reality headset — a wearable device that’s said to be capable of both virtual and augmented reality — have yet to launch.

Hankey stepped into the role after Ive left to start his own design company, LoveFrom. (At the time of his departure, Apple said it would become one of his clients but reportedly stopped working together earlier this year.) Ive worked closely with Apple co-founder Steve Jobs on a remarkable run of products, ranging from candy-colored iMacs to the iPod and the original iPhone, that revived Apple’s fortunes and eventually made it the most valuable company in the world. His work earned him design awards, a knighthood and the company of celebrities like U2’s Bono.

In December 2021, Hankey and Dye offered Wallpaper, a design and lifestyle publication, a rare look inside how Apple’s design team approaches new products. Hankey detailed the methods Apple took to refine notifications and the “tap” on the Apple watch, and how it scanned thousands of ears to perfect the shape of AirPods.

“So much of what we value for the team and for the company, really started in the early days of design at Apple,” Hankey said. “We cannot overstate how lucky we are to be at a company with such a rich and deep foundation. From the very early ‘think different’ mantra to Steve and Jony’s collective focus on craft, care and making tools, to their reverence for the creative process, this is what still drives us.’

Apple has not yet announced Hankey’s replacement.

Erin Hanson has spent years developing the vibrant color palette and chunky brushstrokes that define the vivid oil paintings for which she is known. But during a recent interview with her, I showed Hanson my attempts to recreate her style with just a few keystrokes.

Using Stable Diffusion, a popular and publicly available open-source AI image generation tool, I had plugged in a series of prompts to create images in the style of some of her paintings of California poppies on an ocean cliff and a field of lupin.

“That one with the purple flowers and the sunset,” she said via Zoom, peering at one of my attempts, “definitely looks like one of my paintings, you know?”

With Hanson’s guidance, I then tailored another detailed prompt: “Oil painting of crystal light, in the style of Erin Hanson, light and shadows, backlit trees, strong outlines, stained glass, modern impressionist, award-winning, trending on ArtStation, vivid, high-definition, high-resolution.” I fed the prompt to Stable Diffusion; within seconds it produced three images.

“Oh, wow,” she said as we pored over the results, pointing out how similar the trees in one image looked to the ones in her 2021 painting “Crystalline Maples.” “I would put that on my wall,” she soon added.
An image created by CNN’s Rachel Metz with input from artist Erin Hanson, using the AI platform Stable Diffusion. It resembles Hanson’s work, particularly with its colors and simulated brush strokes.
An image created by CNN’s Rachel Metz with input from artist Erin Hanson, using the AI platform Stable Diffusion. It resembles Hanson’s work, particularly with its colors and simulated brush strokes.

Hanson, who’s based in McMinnville, Oregon, is one of many professional artists whose work was included in the data set used to train Stable Diffusion, which was released in August by London-based Stability AI. She’s one of several artists interviewed by CNN Business who were unhappy to learn that pictures of their work were used without someone informing them, asking for consent, or paying for their use.

Once available only to a select group of tech insiders, text-to-image AI systems are becoming increasingly popular and powerful. These systems include Stable Diffusion, from a company that recently raised more than $100 million in funding, and DALL-E, from a company that has raised $1 billion to date.

These tools, which typically offer some free credits before charging, can create all kinds of images with just a few words, including those that are clearly evocative of the works of many, many artists (if not seemingly created by the same artist). Users can invoke those artists with words such as “in the style of” or “by” along with a specific name. And the current uses for these tools can range from personal amusement to more commercial cases.

In just months, millions of people have flocked to text-to-image AI systems and they are already being used to create experimental films, magazine covers and images to illustrate news stories. An image generated with an AI system called Midjourney recently won an art competition at the Colorado State Fair, and caused an uproar among artists.
“Crystalline Maples”, a 2021 oil painting by Erin Hanson.
“Crystalline Maples”, a 2021 oil painting by Erin Hanson.

But as artists like Hanson have discovered that their work is being used to train AI, it raises an even more fundamental concern: that their own art is effectively being used to train a computer program that could one day cut into their livelihoods. Anyone who generates images with systems such as Stable Diffusion or DALL-E can then sell them (the specific terms regarding copyright and ownership of these images varies).

“I don’t want to participate at all in the machine that’s going to cheapen what I do,” said Daniel Danger, an illustrator and print maker who learned a number of his works were used to train Stable Diffusion.
When fine art becomes data

The machines are far from magic. For one of these systems to ingest your words and spit out an image, it must be trained on mountains of data, which may include billions of images scraped from the internet, paired with written descriptions.

Some services, including OpenAI’s DALL-E system, don’t disclose the datasets behind their AI systems. But with Stable Diffusion, Stability AI is clear about its origins. Its core dataset was trained on image and text pairs that were curated for their looks from an even more massive cache of images and text from the internet. The full-size dataset, known as LAION-5B was created by the German AI nonprofit LAION, which stands for “large-scale artificial intelligence open network.”

This practice of scraping images or other content from the internet for dataset training isn’t new, and traditionally falls under what’s known as “fair use” — the legal principle in US copyright law that allows for the use of copyright-protected work in some situations. That’s because those images, many of which may be copyrighted, are being used in a very different way, such as for training a computer to identify cats.

But datasets are getting larger and larger, and training ever-more-powerful AI systems, including, recently, these generative ones that anyone can use to make remarkable looking images in an instant.
A piece by illustrator Daniel Danger that was included in the training data behind the Stable Diffusion AI image generator.
A piece by illustrator Daniel Danger that was included in the training data behind the Stable Diffusion AI image generator.

A few tools let anyone search through the LAION-5B dataset, and a growing number of professional artists are discovering their work is part of it. One of these search tools, built by writer and technologist Andy Baio and programmer Simon Willison, stands out. While it can only be used to search a small fraction of Stable Diffusion’s training data (more than 12 million images), its creators analyzed the art imagery within it and determined that, of the top 25 artists whose work was represented, Hanson was one of just three who is still alive. They found 3,854 images of her art included in just their small sampling.

Stability AI founder and CEO Emad Mostaque told CNN Business via email that art is a tiny fraction of the LAION training data behind Stable Diffusion. “Art makes up much less than 0.1% of the dataset and is only created when deliberately called by the user,” he said.

But that’s slim comfort to some artists.
Angry artists

Danger, whose artwork includes posters for bands like Phish and Primus, is one of several professional artists who told CNN Business they worry that AI image generators could threaten their livelihoods.

He is concerned that the images people produce with AI image generators could replace some of his more “utilitarian” work, which includes media like book covers and illustrations for articles published online.

“Why are we going to pay an artist $1,000 when we can have 1,000 [images] to pick from for free?” he asked. “People are cheap.”
Meta AI text to video

Meta is using AI to generate videos from just a few words

Tara McPherson, a Pittsburgh-based artist whose work is featured on toys, clothing and in films such as the Oscar-winning “Juno,” is also concerned about the possibility of losing out on some work to AI. She feels disappointed and “taken advantage of” for having her work included in the dataset behind Stable Diffusion without her knowledge, she said.

“How easy is this going to be? How elegant is this art going to become?,” she asked. “Right now it’s a little wonky sometimes but this is just getting started.”

While the concerns are real, the recourse is unclear. Even if AI-generated images have a widespread impact — such as by changing business models — it doesn’t necessarily mean they’re violating artists’ copyrights, according to Zahr Said, a law professor at the University of Washington. And it would be prohibitive to license every single image in a dataset before using it, she said.

“You can actually feel really sympathetic for artistic communities and want to support them and also be like, there’s no way,” she said. “If we did that, it would essentially be saying machine learning is impossible.”

McPherson and Danger mused about the possibility of putting watermarks on their work when posting it online to safeguard the images (or at least make them look less appealing). But McPherson said when she’s seen artist friends put watermarks across their images online it “ruins the art, and the joy of people looking at it and finding inspiration in it.”

If he could, Danger said he would remove his images from datasets used to train AI systems. But removing pictures of an artist’s work from a dataset wouldn’t stop Stable Diffusion from being able to generate images in that artist’s style.
01 Théâtre D’opéra Spatial AI-generated art

AI won an art contest, and artists are furious

For starters, the AI model has already been trained. But also, as Mostaque said, specific artistic styles could still be called on by users because of OpenAI’s CLIP model, which was used to train Stable Diffusion to understand connections between words and images.

Christoph Schuhmann, an LAION founder, said via email that his group thinks that truly enabling opting in and out of datasets will only work if all parts of AI models — of which there can be many — respect those choices.

“A unilateral approach to consent handling will not suffice in the AI world; we need a cross-industry system to handle that,” he said.
Offering artists more control

Partners Mathew Dryhurst and Holly Herndon, Berlin-based artists experimenting with AI in their collaborative work, are working to tackle these challenges. Together with two other collaborators, they have launched Spawning, making tools for artists that they hope will let them better understand and control how their online art is used in datasets.

In September, Spawning released a search engine that can comb through the LAION-5B dataset, haveibeentrained.com, and in the coming weeks it intends to offer a way for people to opt out or in to datasets used for training. Over the past month or so, Dryhurst said, he’s been meeting with organizations training large AI models. He wants to get them to agree that if Spawning gathers lists of works from artists who don’t want to be included, they’ll honor those requests.

Dryhurst said Spawning’s goal is to make it clear that consensual data collection benefits everyone. And Mostaque agrees that people should be able to opt out. He told CNN Business that Stability AI is working with numerous groups on ways to “enable more control of database contents by the community” in the future. In a Twitter thread in September, he said Stability is open to contributing to ways that people can opt out of datasets, “such as by supporting Herndon’s work on this with many other projects to come.”

The UK’s world of politics plunged deeper into turmoil on Wednesday night after a debate on fracking led to alleged physical altercations between Prime Minister Liz Truss’ aides and lawmakers from her own Conservative Party.

Last month, Truss’ government formally lifted a ban on fracking for shale gas that had been in place for England since 2019, arguing that strengthening the country’s energy supply was an “absolute priority.” The main opposition Labor Party brought forward a motion to restore the ban, but some Conservative members of parliament reported they were bullied, even manhandled, into voting in line with Truss.

But what exactly is fracking, and why is it so contentious? Here’s what you need to know.

What is fracking?

Fracking, or hydraulic fracturing, involves drilling into the Earth and injecting water and chemicals at high pressure to break rocks and release the gas trapped inside.
The Cuadrilla fracking site in Preston, in northwestern England.
The Cuadrilla fracking site in Preston, in northwestern England.

Why does the government want to do it?

Following Russia’s invasion of Ukraine, European gas prices have surged to record highs and Britain is subsidizing bills for households and businesses at a predicted cost of more than 100 billion pounds ($110.4 billion).

Britain is heavily reliant on natural gas, which will take years to reduce. Gas heats around 80% of the country’s homes and on some days it can be used to generate almost 50% of the country’s electricity.

The government is seeking to increase domestic gas production, which has been in decline, to reduce its reliance on imports. The industry body Offshore Energies UK says that without new investment, Britain will have to import around 80% of its gas by 2030, up from around 60% now.

How much gas could be produced?

Scientists say this is still unclear. Since only few test wells have been drilled, there are no estimates of proven reserves to confidently predict how much shale gas would be technically and economically viable to extract by fracking.

The government has said that the only way to assess this is to allow drilling to start.

“Lifting the pause… will enable drilling to gather this further data, building an understanding of UK shale gas resources and how we can safely carry out shale gas extraction in the UK,” a statement from the Department for Business, Energy and Industrial Strategy (BEIS) said last month.

Why is it controversial?

Injecting fluids at high pressure can cause tremors in the Earth, while people in the communities affected are also concerned about the impact on the landscape, tourism and agriculture.

Shale gas is also a fossil fuel and campaigners say that extracting more fossil fuels goes against the country’s target to reach net zero emissions by 2050. It also uses a large amount of water and environmental groups have raised fears over possible groundwater contamination.
Fracking has proved hugely unpopular among voters.
Fracking has proved hugely unpopular among voters.

A BEIS public attitude tracker, which uses random sampling, in Autumn 2021 showed opposition to fracking far outweighs support, with just 4% supporting the practice and 45% opposing it.

Which companies are involved?

More than 100 exploration and drilling licenses have been awarded to several companies including Cuadrilla, Third Energy, IGas, Aurora Energy Resources and Ineos.

Cuadrilla, 96% owned by Australia’s AJ Lucas, was the only one of these firms to receive consent to begin fracking.

It found a natural gas resource at its site in northwestern England in 2019, but the rules around tremors meant its operations had to keep stopping, meaning that neither of its two wells could be fully flow-tested.

Which other countries have done it?

Onshore gas fracking is commonplace in the United States, where it has helped to drive down the cost of gas, but the practice remains banned in many European countries, such as Germany and France, while few European countries are believed to have suitable shale gas geology for the technology.

Will it cut energy bills?

Not in the short term and questions remain over how much gas can actually be extracted. Even if large amounts are recovered, the price of this gas would still be subject to global prices.

Former British Chancellor Kwasi Kwarteng said in March when he was Business and Energy secretary gas fracking would not lead to lower British gas prices. “With the best will in the world, private companies are not going to sell the shale gas they produce to UK consumers below the market price,” he tweeted.

Britain’s new finance minister announced a comprehensive retreat on the UK government’s tax-and-spending plans on Monday in a frantic effort to calm jittery markets and restore the government’s credibility.

Just four days into the job, Jeremy Hunt said he would reverse “almost all” tax measures announced three weeks ago by his predecessor. The stunning reversal would raise £32 billion ($36 billion), he said.

A proposed cut to the basic rate of income tax from April 2023 has been postponed “indefinitely.” And while the government has said it will still guarantee energy prices for households and businesses through this winter, it won’t commit to capping prices beyond next spring.

“No government can control markets, but every government can give certainty about the sustainability of public finances,” Hunt said. “The United Kingdom will always pay its way.”

The moves amount to a gutting of Prime Minister Liz Truss’ flagship “growth plan” and leave her in a perilous political position.

The opposition Labour Party said Hunt’s statement highlighted how the government has made life harder for everyday people, as mortgage rates and other borrowing costs have spiked in recent weeks.

“All the Chancellor’s statement underlines is that the damage has been done,” lawmaker Rachel Reeves tweeted.
Investors show support

The announcement helped ease alarm in financial markets on Monday. UK government bonds rallied and the pound climbed 1.2% to $1.13. Yields on 30-year UK bonds, which move opposite prices, dropped to 4.37% after rising above 5% last week. Ten-year borrowing costs fell below 4%.

Investors still remain on edge, however. While Hunt’s policy announcement could deliver a short term “relief rally,” significant volatility is likely to persist, said Francesco Pesole, a strategist at ING.

On Friday, Truss fired Kwasi Kwarteng, her previous finance minister, and reinstated a big tax hike on corporations. But those moves failed to satisfy investors worried about the state of government finances.

Truss faces serious questions about whether she can hold on to her job after financial markets rejected her controversial economic package, which aimed to boost growth by slashing taxes and ramping up borrowing.

Her government has come under huge pressure from investors and other Conservative Party members since the effort was unveiled in late September. While Truss has walked back many of the measures, including a plan to cut the income tax rate for top earners, it’s failed to revive confidence.

Over the weekend, US President Joe Biden said he thought Truss’ trickle-down economic plan “was a mistake.”

“I disagree with the policy,” he said, adding that it was “up to Great Britain to make that judgment.”

The Treasury said that Hunt met with the governor of the Bank of England and the head of the Debt Management Office on Sunday night to brief them on his plans. He’ll share more information with Parliament later Monday.

Plans that have already started working their way through Parliament, including a cut to a tax on house purchases, will go ahead.

But the government will keep the basic rate of income tax at 20% “until economic conditions allow for it to be cut,” saving £6 billion a year. Other tax-cutting measures, such as slashing dividend taxes and the introduction of a new VAT-free shopping program for non-British visitors to the United Kingdom, have also been ditched.

“A central responsibility for any government is to do what’s necessary for economic stability,” Hunt said.
The energy question

The Treasury will lead a review to examine how to ease the pain of high energy costs beyond April 2023, though its guarantees will remain in place over the next six months.

The government said in September that the typical UK household would pay no more than £2,500 ($2,825) annually for their energy for the next two years.

“Looking beyond April, the Prime Minister and the Chancellor have agreed that it would be irresponsible for the government to continue exposing the public finances to unlimited volatility in international gas prices,” the Treasury said in a statement.

Paul Johnson, director of the Institute for Fiscal Studies think tank, tweeted that the review of how to support energy bills past April was “long overdue.”

“It was always wrong to promise an untargeted, universal, massively expensive subsidy for two years,” he said. “It may have been the only option in the short run, but worth spending a huge amount to improve it longer term.”

But campaigners worried that people won’t be able to afford their heating bills were more critical, highlighting the difficult decisions faced by policymakers.

“The country was already facing a financial cliff edge in April due to plans to end other support packages,” Simon Francis, coordinator of the End Fuel Poverty Coalition, a group of civil society organizations, said in a statement. “This cliff edge has now become even steeper.”

The finance minister’s full medium-term budget will still be delivered on October 31, together with a review of the government’s growth and spending plans by the UK’s fiscal watchdog, the Office for Budget Responsibility.

Investors are closely watching the bond market Monday after the Bank of England on Friday ended its £65 billion emergency purchase program, which was intended to temporarily help pension funds hit hard by the market tumult.

While the central bank ultimately bought under £20 billion in government debt, the intervention — announced on September 28 — helped provide some reassurance as the bond market churned.

The Bank of England said Monday that the operations “enabled a significant increase in the resilience of the sector.”

The decision by Jeremy Hunt, the new UK finance minister, to jettison the bulk of Prime Minister Liz Truss’ much-maligned plans to boost growth has come as a huge relief to investors, easing their worries about the sustainability of government finances.

But even if “Trussonomics” has been tossed out and a total market meltdown avoided, the near-term prospects for Britain’s economy look increasingly wobbly.

A recession stretching through the winter looms. Policymakers were facing tough choices even before Truss unleashed financial market chaos. Now, with the government’s credibility tarnished, they’re in an even worse predicament.

“The last month has been like a bad dream, but the situation prior to the last month was not a good dream,” said James Athey, investment director at Abrdn, an asset manager.

The sudden reversal of almost all tax cuts announced just three weeks ago could put financial markets on more stable footing. If borrowing costs had continued to climb, it would have made life harder for millions of households and businesses.
Period residential homes in a south London street, on 6th October 2022, in London, England. (Photo by Richard Baker / In Pictures via Getty Images)

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The British pound rose as high as $1.14 on Monday, though it dropped below $1.13 on Wednesday. Yields on 30-year UK government bonds, which move opposite prices, have dipped to 4.24% after topping 5% last week.

But concerns about the economy are resurfacing in lieu of angst about the country’s financial markets — though on that front, too, uncertainty remains.

Citing a renewed commitment to controlling the country’s debts, Hunt has said the government will universally cap energy prices only until April. Support beyond then will cost taxpayers “significantly less than planned” and be targeted at those most in need, he said. A fresh spike in energy bills could boost inflation again in the spring.

The government’s ability to ease rising living costs will be limited by its attempts to rein in borrowing and concerns that additional stimulus measures will fan inflation further.

Meanwhile, the Bank of England is expected to keep aggressively hiking interest rates, and the pound is likely to drift downward again as foreign investors favor the safe-haven dollar, hurting businesses that import goods.

Goldman Sachs recently downgraded its economic outlook for the United Kingdom, forecasting “a more significant recession” in which activity contracts by 1% in 2023. It said it sees “additional downside risks to growth” following Hunt’s announcements on Monday.
U-turns and their consequences

The original set of economic plans unveiled by Truss and her previous finance minister, Kwasi Kwarteng, were a controversial bid to reignite a British economy that’s still below its pre-pandemic size. Output shrank by 0.3% in August, while inflation stood at 9.9%, according to the Office for National Statistics. It rose to 10.1% in September, once again touching a 40-year high.

But the gamble by Truss to jumpstart growth — predicated on a huge package of tax cuts that required substantial borrowing — was an epic failure. On Monday, Truss apologized “for the mistakes that have been made” in an interview with the BBC.
Jeremy Hunt leaves 10 Downing Street in London after he was appointed Chancellor of the Exchequer following the resignation of Kwasi Kwarteng. Picture date: Friday October 14, 2022. (Photo by Victoria Jones/PA Images via Getty Images)

New UK finance minister rips up Truss’ economic plan in stunning policy reversal

Economists are now racing to figure out what Hunt’s reset means for their forecasts. His decision to ditch most tax cuts and to place a time limit on the government’s energy support has muddied the picture for the next year, even as it’s temporarily placated bond traders.

Inflation could rise again in April if support is rolled back and some households see their bills jump. Goldman Sachs warned that inflation could leap to 11.9% year-over-year in April from its current forecast of 7.1% and “stay higher throughout 2023,” depending on what the government decides to do.

“The Chancellor has created some level of stability in the markets, but has created total instability in people’s households,” said Simon Francis, coordinator of the End Fuel Poverty Coalition, a group of civil society organizations.

Cuts to public spending, the so-called “austerity” that defined the UK’s policy approach in the aftermath of the 2008 financial crisis, would be politically unpopular and hurt vulnerable sections of society. But Hunt indicated that “very difficult decisions” lie ahead given the need to control public debt loads.

While the finance minister’s changes this week will save the government £32 billion ($36 billion), analysts say the government needs to do more to ensure public finances are on the right track. That will leave little room to spend on economic stimulus programs, weighing on near-term growth.

“If you’ve got a spending squeeze and no ability to stimulate with fiscal easing, then the economy is going to struggle to recover from what we think will be a recession this winter,” said Dean Turner, an economist at UBS Wealth Management.
The fallout continues

At the same time, the Bank of England intends to stay tough on inflation. Governor Andrew Bailey emphasized over the weekend that a “stronger response” may be needed to get a handle on price rises. The central bank also said Tuesday that sales of government bonds bought during the pandemic era will begin on November 1.

That could push up bond yields at a moment when they’re still fragile. A premium from the recent chaos is still built into UK borrowing costs, making it more expensive for households and businesses to take out loans.

The yield on benchmark 10-year UK government bonds has dropped back below its US counterpart. But it remains near 4%, up from 3.5% before Kwarteng unveiled the government’s initial “growth plan” (also known as the “mini-budget”) in September.

“It’s too early to say this ‘mini-budget’ premium is here for the long term, but it’s certainly expected to be here for a little while,” Turner said.

The specter of additional volatility in financial markets still lingers. Hunt’s detailed budget, which will be accompanied by an assessment from the country’s fiscal watchdog, will face huge scrutiny later this month.

And restoring investor confidence in UK assets is expected to be an effort that takes time — especially as questions about Truss’ political future swirl. If she is ousted, that would introduce more doubt about the government’s policy path.

“It takes a while for them to feel comfortable again,” Athey of Abrdn said.

Should financiers continue to shun the United Kingdom, put off by the gloomy growth outlook and questions about the government’s credibility, the pound will continue to weaken. That will make it more expensive for businesses to import the goods they need, fanning inflation and further weighing on economic activity.

Athey’s prediction? Even if the currency isn’t swinging sharply, it will face “steady depreciating pressure” in the coming months.

The US housing market is in the midst of a major shift. After two years of stratospheric price appreciation, home prices have peaked and are on their way back down.

But what homebuyers and homeowners alike want to know is: How much lower will prices go?

The short answer: Prices are likely to drop further, but not by as much as they did during the housing bust. From the 2006 peak to the 2012 trough, national home prices fell by 27%, according to S&P CoreLogic Case-Shiller Indices, which measures US home prices.

“It was different in 2008, 2009 because that drop in prices was because of a push from sellers,” said Jeff Tucker, senior economist at Zillow. “Because of foreclosures and short sales there were a lot of extremely motivated sellers who were willing to take a loss on their homes.”

Plus, that housing crash came at a time when the inventory of homes for sale was four times higher than it is now. Current inventory is still substantially lower than pre-pandemic levels, which has increased competition for homes. And that is keeping prices relatively strong.
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How much house can I afford?

“I would be surprised to see prices anywhere drop below where they were in 2019,” said Tucker. “There was some overheating in the housing market in 2021 through this spring that pushed prices higher than what the fundamentals would support. Now they are coming down.”

With mortgage rates more than doubling since the start of this year, the calculations for a homebuyer have changed considerably. The monthly principal and interest mortgage payment on the median priced home is up $930 from a year ago, a 73% increase, according to Black Knight, a mortgage data company.
How low will prices go?
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What will my monthly mortgage payment be?

When you factor in soaring mortgage rates, along with elevated home prices and wages that aren’t increasing as fast, buying a home is less affordable now than it has been in decades, according to Black Knight.

But there may be some relief in sight for buyers.

Economists at Goldman Sachs expect home prices to decline by around 5% to 10% from the peak hit in June.

Wells Fargo has recently forecasted that national median single-family home prices will drop by 5.5% year-over-year by the end of 2023.

Wells Fargo’s economists estimate that the median price for an existing single family home to be $385,000 this year, up 7.8% from last year, but the growth will be a lot less than the 19% year-over-year increase seen in 2021.

The economists anticipate the median home price will fall to $364,000, a decline of 5.5% from this year. They predict prices will rebound and rise again in 2024, with the median price ticking up 3.3% to 376,000 by the end of 2024.

“The primary driver behind the housing market correction thus far has been sharply higher mortgage rates,” the Wells Fargo researchers wrote. “If our forecast for Fed rate cuts is realized, mortgage rates are likely to fall slightly just as cooling inflation pressures boost real income growth. A modest improvement in sales activity should then follow, which will reignite home price appreciation heading into 2024.”
Location, location, location

Ultimately, how much prices fall will depend on where you live.

Unlike the run-up in prices during the pandemic that caused home values in markets across the country to surge, the cooling off will be more regional, said Tucker. The drops will be more deeply felt in places where there were larger gains during the pandemic, many of them in the West and Sunbelt, including cities like Austin, Phoenix and Boise, he said.

“Nationally, we might see a 5% decline from the peak,” Tucker said. “But prices will decline by more in the West and there will be a smaller decline in the Southeast.”

In September, month-over-month home prices dropped in several pandemic hotspots, including Phoenix, down 2.3%; Las Vegas, down 1.9% and Austin, down nearly 1%, according to Zillow.
A “Sale Pending” sign outside a house in Morgan Hill, California, U.S., on Tuesday, Oct. 4, 2022.

US home sales fall for 8th month in a row in September, the longest slump since 2007

And Boise, Idaho, where prices surged nearly 60% during the pandemic, is already seeing annual declines, with prices falling 3.9% year over year in September, according to Zillow.

“A number of metro areas, especially in the West, will see some year-over-year price declines this spring,” said Tucker. “That will be the worst comparison time because that’s when many markets reached their peak.”