"US Interest Rate Hike: 25bp vs 50bp, Treasury Yield Inversion at 85bp"

01, The Super Week Begins

In the coming week, central banks around the world will make their latest interest rate hike decisions, officially kicking off the "Super Central Bank Week."

Australia has taken the lead in December's rate hike, with the Reserve Bank of Australia announcing a consecutive third month increase of 25 basis points. Currently, Australia's overnight cash rate has risen to 3.1%. At the same time, the Reserve Bank of Australia also indicated that further rate hikes may be needed in the future.

Previously, the Reserve Bank of Australia was one of the earliest countries to signal that monetary policy may need to shift, but now several months have passed, and Australia is still in the process of raising rates, indicating that this round of inflation is very stubborn.

Following that, last night the Bank of Canada also made a decision to raise rates by 50 basis points, bringing the interest rate to its highest level since the subprime crisis.

Among the top ten currencies with the largest global transaction volumes, several other central banks will decide on the latest interest rate hikes in the coming days.

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Notably, the market is closely watching next week's rate hike by the Federal Reserve, whether it will be 75 basis points or 50 basis points. In addition, central banks in Norway, the United Kingdom, New Zealand, Sweden, and others will also announce their latest interest rate decisions.

02, Interest Rate Hikes in Asian Countries

On the other hand, emerging markets are also forced to follow suit with interest rate hikes.

On one hand, this is to counteract inflation, and on the other hand, it is to avoid devaluation of their currency exchange rates.The latest news is that the Reserve Bank of India has announced a rate hike of 35 basis points, bringing the new interest rate to 6.5%.

The Governor of the Reserve Bank of India has stated that inflation in India will remain above the 4% target level for the next four months, and India's GDP growth rate for 2023 is expected to reach 6.8%, lower than previous forecasts.

In fact, in November, many countries have already announced interest rate hikes, including Indonesia, South Korea, Thailand, Malaysia, and the Philippines.

In contrast, Latin American countries have relatively fewer interest rate hikes, but now it is predicted that monetary tightening will stop to maintain the upward trend.

Taking the United States as an example, although the magnitude of interest rate hikes may decrease, the terminal interest rate is higher than previously expected, which means that more interest rate hikes are needed to reach the terminal interest rate.

The interest rate hike cycle has been further extended, and the previous "rapid interest rate hikes" may evolve into "long-term interest rate hikes" in the future.

03, European stocks

The European stock markets that closed first last night generally fell, with Germany down 0.57% and France down 0.41%.

However, since the low point at the end of September and the beginning of October, Germany's index has rebounded by more than 20%, entering the technical definition of a bull market.

France has rebounded by 18% after a slight decline in the past two days, and is also just one step away from 20%.The UK stock market index fell by 0.43% last night, but the UK stock market has accumulated a 1.42% increase this year, almost the best performing stock market among Western countries.

Compared with the low point in September, the UK's index has only rebounded by 11.6%. The small rebound is also related to the relatively small decline before.

The UK stock market was only 13% off the highest point of 2022 at the lowest point in early October.

04, US stocks

In the subsequent US stock market, all three major indices are almost falling. Only the Dow Jones Industrial Average rose by one index point, closing flat.

The market is worried that the Fed will continue to raise interest rates for a long time.

Analysts often compare the current inflation and interest rate hikes with the early 1980s, and there are indeed many similarities.

However, there is also a huge difference from the Volcker era at that time. After that round of large interest rate hikes, the economy began to decline, and the Fed immediately began to cut interest rates.

This time, the US economy has shown many signs of recession, but the Fed is still discussing how to raise interest rates, and has raised the terminal interest rate level at the just-ended November meeting.

Now, the phenomenon of US Treasury yield inversion is becoming more and more serious, and the gap between two-year and ten-year terms has expanded to 85 points. Although the US dollar index is falling, the Fed's interest rate hike is declining, and US Treasury yields are also falling, the degree of inversion is increasing, and the only explanation is that the possibility of a deep recession is also increasing.