The bond and stock markets might finally agree on Fed expectations

The bond and stock markets might finally agree on Fed expectations

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Bond and stock markets finally agree on the Federal Reserve.

Morgan Stanley's research note says that stocks and the real yield of the 10-year Treasury have started to move in opposite directions again. Real yields refer to the return investors receive on bonds after inflation. This is a change from earlier in the year when both stocks and yields were moving higher.

The S&P 500 has gained 17% in the last year. This is largely due to tech giants, who have seen massive gains thanks to artificial intelligence.

In March, after the collapse of Silicon Valley Bank and Signature Bank, yields plummeted. However they have risen in the months that followed.

What was the cause of this change? It is unusual to see both bond yields and stock prices rise at the same time. When yields are high, investors tend to choose bonds over stocks.

George Cipolloni said that the unusual pattern in the stock and bond markets this year is due to a mismatch between expectations of the Fed's rate trajectory.

While stocks rose in anticipation of a cooling inflation and a Fed rate cut, yields increased on the contrary prediction.

Cipolloni said that it appears 'they are finally on the same pages'.

The futures market showed that investors were expecting several rate cuts in 2019, but the Fed's constant hikes and hawkish comments led to expectations of those cuts being pushed back to 2024.

In recent weeks, yields fell on the back of new data that showed the economy was cooling.

The latest US labor report showed that the US economy only added 209,000 jobs in July, its lowest monthly gain since December 2020.

The Consumer Price Index for June revealed that the annual inflation rate had slowed down to 3%. This is its lowest level since March 2021. The Producer Price Index only rose 0.1% in the 12 months ending June, reaching its lowest point since August 2020.

These reports have also boosted the stock market rally. Last week, the S&P 500 index and Nasdaq Composite index reached their highest levels since 2023.

Will yields continue falling? The economic outlook is still cloudy, so it's difficult to predict.

Michael Kushma is the chief investment officer for broad markets fixed incomes at Morgan Stanley. He expects yields will move sideways. This is especially true when you consider that the Fed may continue to raise rates in the coming year, as long as inflation is above the 2% target, even though price increases are trending down.

He said that he did not expect to see any big selling or a large rally.

China unveils new rules on generative AI services

Laura He, a colleague of mine, has reported that China is now the first country in the world to have regulated generative artificial Intelligence, the technology behind ChatGPT.

Cyberspace Administration of China released updated guidelines for the industry on Thursday, August 15, which will be in effect.

The final version is less strict than the draft that was released in April. This shows that China is looking for opportunities in an industry that has exploded almost to the point of explosion this year as it struggles to revive economic growth.

If their services are able to "mobilize" the public, the new rules require that generative AI service providers perform security reviews as well as register their algorithms with the government.

These rules are applicable to all services offered to the general public in China.

Monday: Earnings for Citizens Financial Services

Tuesday: June retail sales and sentiment among home builders. Earnings of Morgan Stanley and Bank of America.