According to Woofun AI, sharp fluctuations in the bond market are quietly taking on the austerity function of the Federal Reserve. This rare pattern has brought a new framework for interpreting the trend of the stock market. Mike Wilson, chief stock strategist at Morgan Stanley (MS.US), pointed out in the latest weekly report that with the US 10-year Treasury yield rising by 120 basis points since February, financial conditions have been drastically tightened, and the bond market is actually replacing the Fed in completing interest rate hikes, which may prevent the Fed from further raising policy interest rates. Wilson believes that if the US Consumer Price Index (CPI) data released this Wednesday is moderate, it will help ease long-term yield pressure and market expectations for policy interest rates.
In this context, Wilson provided investors with two major forward-looking signals: the relative performance of financial stocks and the MOVE index, which measures the volatility of the bond market. He stressed that changes in bond market volatility are more indicative than the absolute level of yield, and this week's third-quarter earnings reports for J.P. Morgan Chase (JPM.US), Goldman Sachs (GS.US), Citibank (C.US), and Wells Fargo Bank (WFC.US) will be a key observation window. The effects of the tightening of the bond market are already showing. Wilson pointed out in the “Weekly Warm-up” report released on Monday that due to a combination of factors, monetary tightening effects have played a role in the market: 10-year US bond yields have jumped 120 basis points since February, the US dollar index (DXY) has strengthened, and oil prices have remained high. Together, the three have contributed to a substantial tightening of financial conditions. Global government bond yields are now above 4% overall, for the first time since 2000.
Data compiled by Woofun AI shows that when the bond market has drastically priced higher interest rates, the policy pressure faced by Federal Reserve Chairman Jerome Powell has actually lessened. If this week's CPI data does not rise above expectations, the upward momentum in long-term yields may flatten.
The rise of the S&P 500 masks internal fragmentation. Wilson pointed out that the reason the S&P 500 index does not fully reflect the current tightening of financial conditions is that the index's gains are highly concentrated in a few large market capitalization technology stocks with artificial intelligence as the core -- the growth of these companies is sufficient to withstand the impact of rising capital costs.
This structural differentiation is clearly reflected in the breadth of the market. Weighted indices such as the S&P 500 have lagged behind the market capitalization weighted index by 6 percentage points since March, indicating that ordinary individual stocks have been under more upward pressure from long-term interest rates. Wilson emphasized that for most stocks, the rapid rise in yield has caused substantial damage. Two big signs determine whether the worst is over. Wilson suggests investors focus on tracking two indicators to determine whether market pressure has peaked. The first is the MOVE Index, an index of bond market volatility. Wilson believes that what really matters is not the absolute level of yield, but rather the rate of change in yield and its volatility. The fall in the MOVE index will be an important sign that the pressure on the bond market is easing. The second is the relative performance of financial stocks. This week coincides with JPMorgan, Goldman Sachs, Citi, and Wells Fargo intensively disclosing the third-quarter results. Wilson believes that if the bank's financial performance is steady, it will send a signal of “completely lifting the alarm” to a considerable extent.
Recession fears or being overpriced. Although Wilson acknowledges that the continued rise in yields is at risk of developing into resistance to growth, he currently believes that this situation has yet to materialize. He pointed out that this round of rising yields is largely due to economic growth itself and the demand for capital driven by it, rather than simply driven by inflation or policy expectations. From the perspective of real interest rates, Wilson reduced the current CPI of about 3.4% year over year and the federal funds effective interest rate of 3.88%. The interest spread was far below the peak level before the previous recessions, indicating that the market's pessimistic expectations of growth prospects are overestimated. Combined with optimistic expectations for the upcoming earnings season, Wilson concluded that there is still room for improvement in US stock trends.