Good discussion - I was riveted to that scene. It was creepy and intimate and very intense. I'm of two minds - on one hand, it does imply that there could have been a rape with the notion of impotency introduced and the guy saying basically that using a knife doesn't mean you're impotent, let me change the way you think about that.

We're getting things from Hotch's POV, so it's clear he doesn't really want to go there in his memories.

I got the impression, though, that he might have stabbed him in the groin area, either injuring him permanently (ie not being able to have children, not being able to be sexual) or penetrating him sexually with the knife. I think the show will make it more clear over time, but for right now, it's probably enough to give us room to speculate on the trauma Hotch is hiding.