The globally anticipated U.S. October CPI data, released overnight, fell below expectations, sparking a celebration in the global capital markets. This implies that the U.S.'s aggressive interest rate hike strategy may be on the verge of change, potentially signaling a turning point for the currency devaluation of other global economies, which have been dragged down by the Federal Reserve's rate hikes.

01 Slowing Down of U.S. Interest Rate Hike Expectations

The Federal Reserve's interest rate hikes in 2022 have mired global capital markets in difficulty, given the dollar's hegemonic status internationally, which dictates that all global economies are affected by the dollar's trajectory.

2022 has been a year of extremely complex economic conditions. We faced a resurgence of the global pandemic, an escalation of the Russia-Ukraine conflict, and the U.S. entered an interest rate hike cycle after continuous monetary easing. These factors have led to high inflation, economic downturn, a reduction in capital market assets, rising unemployment, and a tough life for the public.

Ultimately, the core factor is that the U.S. holds the initiative. In 2020 and 2021, to save the economy, the Federal Reserve engaged in monetary easing. At the beginning of the pandemic in 2020, the Fed made two emergency rate cuts and initiated an "unlimited" quantitative easing policy. In conjunction with the Fed's monetary "flood," fiscal policy also provided a "big stimulus," which continued to drive high inflation.

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We say that inflation requires two conditions: a gap in the supply and demand of the real economy and an over-issuance of currency. The over-issuance of currency has been discussed, which is the U.S.'s "unlimited" quantitative easing policy. The gap in the supply and demand of the real economy is due to the severe impact on the global supply chain caused by the pandemic and the Russia-Ukraine conflict, leading to a shortage of goods in the real economy, a halt in most services, a blow to U.S. economic growth, and massive unemployment!

In fact, we have already analyzed this when discussing British inflation. During this period, Federal Reserve Chairman Powell and former Chairman Yellen, now the U.S. Treasury Secretary, emphasized employment and economic growth, not inflation. Therefore, at that time, to save the economy, they were willing to pay the price of high inflation!

The monetary easing directly pushed up consumer prices and also drove a rapid increase in international commodity prices, such as oil, non-ferrous metals, steel, agricultural products, coal, etc.! So, how severe is the inflation? An American friend mentioned that 18 months ago, a 40-pound box of chicken wings cost about $85, but now it costs around $150.

Since the beginning of this year, U.S. inflation has been uncontrollable, leading to the start of interest rate hikes. In March, there was a 25 basis point rate hike, bringing the interest rate to the 0.25-0.50% range. In May, there was a 50 basis point rate hike, and U.S. inflation became uncontrollable, with the CPI year-on-year growth consistently above 9%, reaching the highest increase in 40 years. In June, the aggressive interest rate hike path began, with a direct increase of 75 basis points. In July, another 75 basis point rate hike continued, but inflation remained high. Therefore, in September and November, another 75 basis point rate hikes were implemented, at which point the U.S. interest rate had risen from the previous 0-0.25% to 4%. In the middle of this, there was actually a hard landing for the U.S. economy, as this round of rate hikes was indeed too aggressive!After a series of consecutive interest rate hikes of 75 basis points every two months, the data released for November has finally shown some improvement. The US CPI rose by 7.7% year-on-year in October, lower than the market expectation of 7.9%, and significantly lower than the previous value of 8.2%. This is the lowest level since January, when the US CPI rose by 7.5% year-on-year.

Thus, the data has shown a decline, which implies that the US's aggressive interest rate hike strategy may be about to change, and the high inflation in the US may have reached its peak. The market is jubilant, and there is a significant surge across the board in the US stock market, bond market, commodities, and the currencies and stock markets of other economies!

However, will the US inflation peak and drop quickly? Will the inflation in other economies also decrease? These are the questions we need to ponder.

02 Will inflation drop quickly?

As we mentioned earlier, the downward trend in US CPI data suggests that inflation may have peaked, but can it drop quickly? This is a big question mark!

Just as it took nearly a year of interest rate hikes to suppress inflation that was fueled by monetary easing, similarly, it is more difficult and takes longer for inflation to drop than to rise.

We know that stimulating the economy relies on monetary and fiscal easing, which undoubtedly boosts inflation, which is what the US has been doing in the past two years. To suppress inflation, tightening is needed, which means interest rate hikes, and the US has done this as well. The aggressiveness is due to the hegemonic status of the US dollar, which can transfer inflation globally. However, this will undoubtedly lead to a hard economic landing!

Therefore, the current reduction in inflation data has strengthened the expectation of the Fed's aggressive interest rate hikes. After all, if the hikes continue, the economy will not be able to bear it. So, once the pace of rate hikes slows down, will inflation rebound? This is inevitable!So, according to the Federal Reserve's intentions, interest rate hikes will continue. The current interest rate is at 4%, and the Fed's expectation is to raise the rate to 4.75-5%. Based on the Fed's forecast, there is an 80% chance of a 50 basis point rate hike in December, which is a reduction compared to 75 basis points, but interest rate hikes are still ongoing! Therefore, it is clear that the Federal Reserve is preparing to prolong the tightening period to mitigate the speed of economic downturn.

Thus, the most likely path for the Fed going forward is a gradual retreat from rate hikes: a 50 basis point increase in December, a possible halt to rate hikes in the first half of next year, but in the second half, there is a high probability of rate cuts to stimulate the economy! Following this path, inflation may not come down until the middle of next year!

03 When will the global economy emerge from the quagmire?

U.S. inflation is about to peak, but when will other economies be able to emerge from their predicaments? When will the global economy emerge from the quagmire?

As we mentioned earlier, the liquidity that the Federal Reserve has released is being paid for by the entire world!

Now, other economies are deeply affected by U.S. interest rate hikes and are experiencing a major collapse, such as the United Kingdom mentioned earlier, as well as Japan and South Korea, and China is also not faring well. Europe, in particular, will be more affected, especially with the energy crisis leading to a surge in energy prices. Inflation in the UK is at a 40-year high! Germany, France, Spain, and others are also at high levels, and their economies are mired in difficulties!

However, what sets us apart is that we have the world's largest consumer market. Under the influence of the pandemic, we are accelerating our internal circulation. Therefore, during the Fed's interest rate hike cycle, we can choose not to follow suit, so our monetary policy remains moderately loose. Coupled with our extensive toolkit, tools like "hot and sour rice noodles," "spicy and numbing rice noodles," and "sweet and spicy rice noodles" mentioned in the market are all instruments for adjusting liquidity. As a result, our inflation has not seen a significant increase!

U.S. inflation is expected to come down by the middle of next year, while some European countries will need a longer time, as the energy issue remains a significant disruption!

Looking at Japan and South Korea, inflation is not high, but their currencies have depreciated significantly, and their economies are facing trials. The Japanese economy has already lost three decades, and the yen is still at rock bottom. Although the yen's depreciation is beneficial for exports, it is heavily affected by the pandemic, and the yen has a longer path of depreciation ahead!

As for South Korea, under depreciation, it faces a bond market crisis. The shrinkage rate of the South Korean corporate bond market has set a historical record. In an effort to curb the depreciation of the won and to suppress overheating inflation, the Bank of Korea is striving to keep pace with the Federal Reserve, accelerating the pace of interest rate hikes, leading to an increase in borrowing costs and a weak credit market! South Korea is caught in a vicious cycle of "inflation-raising interest rates-economic deterioration."Of course, our economy is also experiencing a downturn, with the Chinese yuan significantly depreciating, the capital market remaining sluggish, especially the Chinese stock market, which has gone through a long period of selling pressure. The real estate market is also in a slump, particularly under the impact of the pandemic. The semiconductor industry is being targeted by the United States, and the physical economy is facing difficulties. However, we have our advantages, such as a large consumer market, which allows us to accelerate the internal circulation and concentrate efforts on major tasks. Currently, the country is working on creating a unified national market. In the future, as pandemic restrictions ease, with both external and internal circulations in place, the economy will see a certain degree of recovery! It all depends on the upcoming containment policies!

Overall, this economic recession is global, and no country is immune. Of course, the United States, due to the global status of the dollar, holds the initiative in this global economy, reaping benefits from other economies. However, our future strategy is the internationalization of the Chinese yuan, so this may be our opportunity and turning point!