The good news that we won the war on inflation seems to have come from the CPI report the previous day. The previous day, both the consumer price index and the core consumer price index were below expectations, and in the case of the core, it gave an atmosphere of whether or not we have caught a significant level of inflation except for housing costs. The market is reasonable to assume that the cycle of raising the benchmark interest rate was virtually ended in July, and now we need to discuss lowering the benchmark interest rate.

Looking at the probability of a rate hike in December and January in the federal funds futures market, the probability of a rate hike in December and January is actually converging to zero, and the rate cut will begin in June next year, with a 100bp cut by the end of the year. It seems that they expect the rate cut to be faster after that. In particular, the probability of a 100bp cut at the end of next year was reflected at around 31% a month ago, but now it is around 70%. For your information, considering that this probability was less than 10% in early October, when Higher For Longer was the most prominent, expectations for a 100bp cut have increased significantly in just a month.

And the view after that is much more aggressive, with some IBs emphasizing that this rate cut cycle requires a base rate cut of more than 300 basis points, especially next year’s rate cut is likely to be very fast. I think it’s a very satisfying view, but I think it can be a very concerning view behind it.

Anyway.. Now that the rate hike is over, the market cheers that we need to discuss a rate cut… The stock market response was very hot. The Russell 2000, a small and medium-sized American stock that was directly hit by the rate hike, rebounded more than 5% at once, approaching the 1,800-point level. And the Nasdaq Composite, led by Big Tech, was strong, and now it’s near the peak it hit in July. The S&P 500 once again crossed the 4,500-point mark, which was called the strong resistance and support level, and ended the day slightly back. It’s noteworthy that the dollar weakened very strongly along with this level of strength in asset prices. The yuan sank to 7.25 yuan per dollar. If the weakness of the yuan and falling interest rates in the U.S. lead to this level, and if the conflict between the U.S. and China is eased as expected, the pace of China’s economic stimulus could accelerate. When U.S. interest rates are high, any stimulus China may use could come as a boomerang of a weak yuan. If U.S. interest rates are lifted, it could give a significant boost.

The exchange rate of the dollar has also been pushed down to 150 yen, and the exchange rate of the dollar, which has been moving in line with the movement of the yuan and the yen, has also fallen sharply, reaching 1,305 won. As interest rates in the U.S. come down and the dollar weakens, the two swords of high interest rate and strong dollar are weakening. Is this the end of hard work and the beginning of happiness? ^^

Today, the Fed’s dovish governor, Ostan Goolsbee, commented, “It’s too early to say we’re going to win. It’s emphasizing that we’re still way off our target. At the IMF conference last week, Chairman Powell also mentioned that price stability today could be a fake. It’s intuitive to see that. It’s similar to last year’s October-November… There’s a driving force behind prices. They’re high-interest rates and strong dollars. Last October, when the dollar hit 1,440 won, the dollar helped the U.S. to curb inflation while curbing import prices.

And the 10-year Treasury interest rate, which was close to 4.3% and the willingness to raise interest rates further, has given rise to a great push to dampen inflation. But then again, when pivot expectations arose in an instant, the exchange rate was pushed down to $1,215 and the 10-year Treasury rate dropped to 3.3%. And the market responded with a surge in asset prices, which keeps consumption going, so that inflation resumes. And the high interest rates and the strong dollar, which are the driving forces behind this inflation, have become dull one day. And the problem of inflation rising again, which could have been suppressed more quickly, has created a problem that continues from March of the 21st to the present. And if inflation continues for a long time, you have inflation expectations. In fact, microscopically, the long-term expectations of five-year inflation are moving little by little.

If you look at the bond market, you can feel a little bit. The 10-year rate is bigger than the 2-year rate. The 2-year rate is 4.83%.. The 10-year rate is 4.45%. The interest rate difference between the two is around 39bp, and considering that the interest rate difference at the time Rory Logan, known as the hawk’s change of mind, mentioned term premium in early October was 12bp, the short- and long-term interest rate difference has widened again. Short-term interest rates haven’t fallen much, but long-term interest rates have fallen significantly. What does it mean? Long-term interest rates consist of both the movement of short-term interest rates and the movement of term premiums that I mentioned before. If short-term interest rates hadn’t moved significantly, the dramatic decline in term premiums would explain the long-term interest rates that are now. Powell said at the FOMC in early November that the rise in term premiums has resulted in a tightening effect, reducing the need for further tightening.

So if you’ve had a major slump in premiums over that period and the tightening of the financial environment has been significantly loosened … what do you think now? And at the same time, the dollar has weakened, and interest rates have declined rapidly. And the rate of rebound in asset markets is much faster than in the past year. So the blades of high interest rates and strong dollars will become dull, and the tightening of the financial environment will also be loosened quickly. So then we can create another problem of slowing down and not scoring a wedge in the final stages of suppressing inflation.

I don’t think you should get too excited about winning the lottery. My teacher is scolding me… You should be quiet… You can go to overtime with a wink of thought that it’s almost over. Let’s watch Fed members change their minds to control the mitigating atmosphere. I think there will be comments that remind me of parallel parking. Thank you.