10-Year Treasury Yield Breaches 5%, AI Slowdown Debate Spreads

The 5% figure is more than just an economic indicator; it acts as a psychological resistance level for market participants. In the past, whenever a specific high point was breached, a large volume of logic-based automated trading orders tended to be released.

After the Producer Price Index (PPI) announcement last Thursday, the probability of an interest rate hike on FedWatch rose sharply. Many experts who initially predicted a rate freeze are now shifting their stance towards a rate hike. Strong voices are emerging among bond market participants, advocating for interest rate increases.

Despite former President Trump's recent comments on interest rate cuts, the market showed little reaction. This suggests that the Federal Reserve maintains independence, unswayed by external political pressure. In this situation, the possibility is raised that Chairman Jerome Powell might encourage free votes rather than persuade governors, risking an accumulation of individual 'yes' votes for rate hikes from Fed governors.

Current indicators show a slowdown in inflation, and inflation figures excluding oil prices are trending downwards. However, the bond market continues its sell-off, and the Fed's failure to provide clear messaging on these market movements is exacerbating anxiety.

The bond market is currently expressing a strong negative outlook on US Treasuries. To quell this market instability, active messaging from the Federal Reserve is essential. If the Fed clearly states its readiness to respond to irrational behavior in the bond market, market anxiety could quickly dissipate. This becomes even more critical given the US government's rapidly increasing interest expenses and Wall Street's aversion to the Fed's asset purchase policies.

The Federal Reserve is just three days away from its benchmark interest rate decision. Given the tightening stance the Fed has maintained, it is difficult to suddenly change course. Nasdaq's failure to break its all-time high is not unrelated to this uncertainty. Some point out that if the Fed had resolved its conflict with the bond market around August, it would not be cornered as it is now. Market attention is particularly focused on whether and what will be disclosed in the September dot plot.

Conversely, if interest rates are raised with dissenting opinions among Fed governors, the market will interpret this as a sign that the rate hike stance will be restrained. Historically, as during Chairman Greenspan's era, disagreements among governors can signal the potential for rate adjustments.

If interest rates are frozen in an 8-4 split due to disagreements between regional bank presidents and Fed governors, there's a possibility that rates could temporarily spike significantly. However, the stock market is not expected to fall sharply even if rates surge. This is because the market would still believe that the willingness to supply liquidity remains active.

While the S&P and Dow indices recently hit new highs, Nasdaq failed to reach a new high. Although external factors like war played a role, the Federal Reserve's reduction in liquidity supply is also a major contributing factor. In fact, the Fed's assets decreased by over $10 billion in August, leading to a widening spread between lending and deposit rates, which can be seen as evidence of liquidity tightening.

The Federal Reserve appears to be trying to control the market through liquidity rather than raising interest rates. While a $60 billion buyback policy was implemented, it has not been effective as key economic indicators such as the Producer Price Index (PPI) and Consumer Price Index (CPI) have fallen short of market expectations. The pressure for interest rate hikes from bond market participants remains strong.

OpenAI announced it is postponing its initial public offering (IPO). However, considering the increased ease of use and popularization of AI services, the prevailing interpretation is that confidence in AI's growth potential outweighs interest rate burdens. In other words, despite current interest rate levels, the AI industry is still considered an attractive sector capable of raising sufficient funds for investment.

This means the bond market has largely priced in future benchmark rate increases. However, depending on the outcome of future Federal Open Market Committee (FOMC) meetings, bond market volatility could further expand. Investors are getting closer to the point where they can raise funds, invest, and make money even at current interest rate levels.

In particular, currency risk also poses a potential negative impact on the performance of domestic memory companies.

Just as the stock market rose despite former President Trump's low approval ratings in the past, unexpected movements could occur this time. In particular, there is a high possibility that hyperscaler companies will report very strong earnings, making it noteworthy whether market expectations and actual performance will diverge.

It is unlikely that the Federal Open Market Committee (FOMC) will unanimously raise interest rates and deliver a hawkish message about many future hikes, especially with the midterm elections two months away. The market needs reassurance regarding concerns about such aggressive rate hike messaging. Instead, a split decision through free voting is being discussed.

However, it is uncertain whether this regulatory clarification will lead to an increase in stablecoin issuance. Some analysis suggests that stablecoin usage and bond demand will only increase when coin prices rise.

Such collusion is difficult to succeed without the participation of major competitors like China. Ultimately, the pace of AI technology development is expected to be determined by autonomous market competition.

Just as various AI startups like Perplexity existed in the past but withered, there is an apparent intention now to form a league of only a few companies with superior models. This can be interpreted as established market players not wanting to admit new players into their 'house'.