This is a a bug affecting nearly all aircraft in MSFS:
When flying with Flight Director ON but Autopilot OFF and any lateral mode selected (HDG - FMS - VOR - LOC doesn’t matter), the Flight Director commands wings level and does only respond to the active vertical mode.
When selecting autopilot ON the flight director starts responding to the active lateral mode and the autopilot starts following it.
Of all the aircraft I’ve tested so far only the Airbus A320 seems to be unaffected but that might be due to the A32X mod.
In a real aircraft, the only difference between autopilot ON, and autopilot OFF, is that when it is selected ON, clutches in the electric aileron and elevator servos engage, so that the flight director steering commands are applied to the control surfaces. The flight director is part of the overall autopilot system, and the command bars should reflect any adjustments the pilot makes to the heading or pitch modes, whether the autopilot is engaged or not.
A big annoyance for me as well is that the VS mode, when selected commands the last commanded vertical speed instead of the current vertical speed.