Hedge funds increase positions to sell the dollar. China may resort to additional stimulation of the economy

The US consumer credit growth slowed to a more than two-year low in May, reflecting the first decline in volume since the pandemic began. Total loans rose by $7.2 billion. This figure, which excludes inflation, was below all forecasts. While low unemployment and steady wage growth have allowed many consumers to continue spending, persistently high prices are forcing others to save.

Societe Generale’s top economist says Central Banks are at the “end of the road” in fighting inflation. A resilient labor market and the apparent strength of the economy mean the US Federal Reserve is likely to raise the interest rate by 0.25% in July. According to CME Group’s FedWatch tool, the market rates the probability of a rate hike at 90%. Nevertheless, hedge funds have shifted to an overall bearish bet on the dollar for the first time since March, believing the Federal Reserve is nearing the end of its interest rate hike cycle. Over the past week, credit investors opened a net short position in the US currency of 20,091 contracts. A week earlier, their long position totaled 5,196 contracts.

The UK government and the Bank of England “will do whatever is necessary, for as long as it takes” to bring inflation back to the 2% target, Treasury Secretary Jeremy Hunt said on Monday, reinforcing signs that interest rates will remain high for some time to come. UK inflation hit a 41-year high of 11.1% in October and is falling at a slower pace than in other major economies. Last month, the Bank of England unexpectedly raised its key interest rate by 0.5% to 5% after inflation held at 8.7% in May. Markets expect rates to peak at 6.25% or 6.5% later this year or early 2024.

On Sunday, French Central Bank governor François Villeroy de Galhau opposed a proposal to raise the European Central Bank’s inflation target to 2%. Villeroy, who sits on the ECB’s governing council, also said that interest rate hikes are close to the maximum and that rates will be held at elevated levels long enough for their impact on the economy to be felt.

Oil prices rose in Asian trading on Tuesday on the prospect of supply cuts by the world’s biggest oil producers, while expectations of expanded stimulus measures in major importer China also boosted sentiment. The prospect of supply cuts (Saudi Arabia and Russia have pledged to cut production further) is also bullish for oil prices. Nevertheless, caution over upcoming US inflation data and speeches from the Federal Reserve are holding back gains as markets want more information regarding the US Fed’s future trajectory.

Asian markets traded flat on Monday. Japan’s Nikkei 225 (JP225) decreased by 0.49% for the day yesterday, China’s FTSE China A50 (CHA50) added 0.70%, Hong Kong’s Hang Seng (HK50) was up by 0.89% for the day, and Australia’s S&P/ASX 200 (AU200) closed negative by 0.55%. Most Asian stocks rose sharply on Tuesday amid expectations that the Federal Reserve is close to ending its interest rate hike cycle for this year, while the prospect of additional stimulus measures from China also contributed to sentiment.

A string of weak economic data from China has caused bets to rise that Beijing will take additional stimulus measures to help support the slowing economic recovery. Inflation data on Monday showed that consumer spending is on the verge of deflation, sending mostly bearish signals for Asia’s largest economy. Shares in China’s big real estate developers rose on Tuesday after the People’s Bank said it would extend financial support for the sector until the end of 2024. But despite a slew of stimulus measures, China’s economy is still struggling to recover from COVID-era lows, and weak economic data over the past three months supports that view.