MBS RECAP: Widespread Reprices After Lockhart Comments

Atlanta Fed President Dennis Lockhart is a pragmatic and reasonable member of the FOMC.  He doesn't consistently grind an axe in the same way that several other Fed speakers can, instead adapting to the situation at hand as it changes.  In my view, he's one of the best Fed speakers to pay attention to for these reasons, or at the very least, not one to be ignored.

Markets certainly didn't ignore him today when the following wires came out from Dow Jones:

DJ - LOCKHART SAYS 'SIGNIFICANT DETERIORATION' IN DATA WOULD CONVINCE HIM TO PUT OFF RATE INCREASE

DJ - LOCKHART SAYS SEPTEMBER COULD BE 'APPROPRIATE TIME' TO LIFT INTEREST RATE

DJ - ATLANTA FED'S LOCKHART SAYS FED IS 'CLOSE' TO BEING READY TO RAISE SHORT-TERM RATES

Any time a Fed speaker references a FUTURE change in data as a condition for a change in policy stance, we can safely assume that the speaker is up to speed on everything that has come out by the time of the speech/interview/writing.  In other words, Lockhart knows about last week's wage growth data and about Monday's bond-friendly data.  Therefore, we can safely assume that these reports do not constitute a "significant deterioration" in his mind. 

The implication is that a 2015 rate hike is still very much on the table, or the Fed very much wants us to believe it is on the table.  Either way, markets acted surprised by Lockhart.  Bonds sold off aggressively and stocks sold off moderately by the time the news finally circulated (it wasn't widely reported at first, and selling noticeably increased when larger news aggregators picked up the story). 

So was it all about Lockhart?  That's a fair question, and the answer is "almost certainly."  Now...  it would be VERY easy to convince someone otherwise if you showed them the right chart.  For instance, why not make a case for the European close being the catalyst for Treasuries to begin drifting higher?

But such a chart is deceptive.  While there could be some correlation with Europe and shifting tradeflows after the EU close, it wouldn't explain the move very well if we zoomed this chart in enough to see when and how it actually occurred relative to the Lockhart news.  Fortunately, there's an even easier way to know, and that is simply to see if Fed Funds Futures moved at 1:30pm.  Indeed they did--right back to their highest likelihood of a 2015 hike since mid June.  In this chart, lower values equate to higher likelihood of a hike by the December meeting.  The vertical line today occurred shortly after Lockhart.  Case closed.