On this Friday before a long holiday weekend, both interest rate prices and equity futures are trading lower on news that China will lift bank reserve requirements another 50 basis points to 19.5%, a new record. This is the seventh time China has raises the requirement in the last 13 months to ward off inflationary pressures.

“This latest round of tightening doesn’t come as a shocker and backs up the central bank’s statement on December 3rd that policy would now move from a ‘moderately loose’ stance to a ‘prudent’ stance,’” said economists at BMO Capital Markets. “Nonetheless, it doesn’t take the hurt away and we’re seeing the nervous reaction in global stocks and currencies.”

S&P 500 Futures are 5.50 points lower at 1,275.80 and Dow Futures are 53 points lower at 11,630. The 2.625% coupon bearing 10 year Treasury note is -6/32 at 94-05 yielding 3.327%. The February delivery FNCL 4.5 MBS coupon is -6/32 at 102-16.

With the exception of Natural Gas and Heating Oil, commodity prices are also weaker this morning. Light crude oil is down 1.09% at $90.40 per barrel while gold prices are down 0.58% to $1,364.75 per ounce.

Meantime, the Q4 earnings season continued late Thursday with Intel taking in a net profit of $11.7 billion for 2010 with revenue of $43.6 billion. AFP says that’s a 167% jump from 2009.

 “2010 was the best year in Intel's history,” said chief executive Paul Otellini in the report. “We believe that 2011 will be even better.”

This morning, JPMorgan reported its Q4 earnings were up 47% compared to the same quarter in 2009. The Wall Street bank posted a profit of $1.12 per share, against consensus forecasts of $1, helped by narrowing losses on bad loans that allowed it to release $2 billion in reserves.  

Key Events Today:

8:30 ― As with producer prices, the Consumer Price Index is expected to climb more than in previous months due to rising energy prices. The index inched up 0.1% in November and is expected to rise 0.4% in December, pushing the annual change up to 1.3% from 1.1%. Core prices are set to inch up 0.1%, leaving the annual change stable at 0.8% ― well below the Fed’s unofficial 2% target level.

“The core CPI should only creep 0.1% higher, but a jump of more than 5% in energy prices should push overall consumer prices up 0.6%,” said economists at IHS Global Insight, noting that gasoline prices probably rose 9%. 

“Gasoline pump prices climbed more than 12 cents/gallon, and since prices normally fall in December, the seasonal adjustment process will amplify these gains,” they added. “Core inflation remains quiet, though, as producers are fighting for business and retailers beat each other up for market share.”

Analysts at BMO Capital Markets noted the rise in gasoline prices marked the sharpest jump for any December since 1935.  The fact that December is typically a time when gasoline prices soften means the seasonal factors will actually boost the raw figures, they added. 

8:30 ― The key release this week is the Retail Sales index for December. Economists anticipate a 0.8% rise in the month, equivalent to the November gain which was described as “surging.” The gains are expected to be less broad, however, in part because of rising oil prices.

“When you’re buying new vehicles and filling their tanks with expensive gasoline, you don’t have as much money left over for other things, and it’s much harder to spend what’s left over when you’re waist high in snow,” said economists at BMO Capital Markets. 

Excluding auto sales, the index should rise 0.7%, compared with +1.2% a month before.

“Strong personal consumption, consumer sentiment and expectations point to strong retail sales in December,” said analysts at BBVA, who say retail sales have advanced an average of 1% in the last five months. “Possible improvements in labor markets and new tax cuts are also expected to support retail sales in the coming months.”

Economists at BTMU added that the retail sector continues to battle a high unemployment rate, “but consumer confidence is picking up and government stimulus should help boost jobs and spending in 2011.”

9:15 ― Industrial Production should rise 0.5% in the final month of 2010, a slightly better pace than the 0.4% uptick in November. The November gain was considered “solid” as manufacturing climbed 0.3%, construction jumped 0.9%, and utilities output halted a three-month downward trend and rebounded 1.9%. 
Positive readings in recent manufacturing surveys suggest continued growth in December, particularly with the Chicago Business Barometer clocking in with a 22-year high, according to Deutsche Bank.

“Industrial production should climb 0.7% in December, with a very cold month ― the coldest December since 2000 ― spiking utility output more than 3% higher,” said economists at IHS Global Insight. “The manufacturing sector should have a decent month, too, with some help from motor vehicles, taking overall manufacturing up 0.5%, in line with bullish production reports from the ISM survey.”

9:55 ― Consumer Sentiment is on the rise but continues to be held back from big gains due to high unemployment, rising gasoline prices, and a wrecked housing market. The Reuters / U of Michigan index is forecast at 75.4 in January, just less than a point up from December’s final figure. December’s figure was the highest since June, but remains relatively low with the economic outlook component at just 67.5.

“The Index of Consumer Sentiment edged up to 74.5 in December, but we think it has further to rise,” said economists at Nomura. “Strong stock prices, falling jobless claims and generally improving news about the economy should support household confidence. In addition, the tax compromise agreement reached between the White House and Congressional Republications should lift the ‘Opinions about government policy’ index in the report, which is closely correlated with the total index.”

10:00 ― The week’s final major release, Business Inventories, should rise 0.7% for the second consecutive month in December. Estimates from the 26 economists polled by Reuters range from +0.2% to +1.3%.

On already-reported gain of 0.8% for the manufacturing sector led analysts at Nomura to look for a 1% increase overall.

“Despite this healthy growth, inventories look likely to subtract more than 2 percentage points from Q4 GDP ― because inventory growth will be down from Q3,” they added.

10:15 ― Fed buys an estimated $6-8 billion in Treasuries maturing between 1/31/2015 and 6/30/2016.

12:00 ― Jeffrey M. Lacker, president of the Richmond Fed, speaks on the economic outlook before the Risk Management Association's Richmond chapter.

1:15 ― Eric Rosengren, president of the Boston Fed, speaks before the New England Mortgage Expo hosted by the Connecticut Mortgage Bankers Association and
The Warren Group.