Looking ahead to new homes sales data and the release of the FOMC statement this afternoon,  interest rates are moving higher and equity futures are rallying. This follows an uplifting State of the Union address last night. (More on that later)

The 10 year Treasury note is -11/32 at 93-25+ yielding 3.373%. The FNCL 4.5 is -9/32 at 102-02. The 2s/10s curve is 2bps flatter at 273bps wide.

S&P 500 futures are trading 4.00 points higher at 1,291.50 and Dow futures are 31 points higher at 11,953.

Earlier this morning, we heard from the MBA on the Mortgage Applications index for the week ending Jan. 21. Loan application volume tumbled 12.9%. Refinancings plummeted 15.3% from a six-week high to 12-month low, while the purchase index slid 8.7% to its lowest level since October.  The average contract rate for 30-year fixed-rate mortgage increased three basis points to 4.80%.

Key Events in the Day Ahead

10:00 — New Home Sales are expected to inch forward from levels recently described as “miserable” and “at rock bottom” in December. Economists polled by Reuters expect the index to report the annualized pace of sales to be 300k, just up from 290k in November. That’s not much higher than August’s all-time low of 274k (with data going back to 1963). In November, the index rose 5.5%.

“With a slowly improving job market, December sales should see a modest bounce from November's fifth lowest reading on record,” said economists at IHS Global Insight., who project a modest increase owing to an improving job market and growing economy.

“December's improvement in single-family housing permits ― normally a good leading indicator for new home sales ― might seem to point to a much stronger outcome,” they added. “But December's rise in permits was distorted by pending building code changes in New York, Pennsylvania and California.”

1:00 — Treasury will auction $35 billion 5-year notes maturing on January 31, 2016.

2:15 — Not much is being forecast for the FOMC Statement, despite this being the first meeting of 2011 with the Fed’s new lineup of voters.

“Despite the shift in the composition of the FOMC to a slightly more hawkish Fed, the course for monetary policy is unlikely to be altered in anyway meaningful way this year,” said economists at TD Securities.

The new voting members are Chicago Fed President Charles Evans, Minneapolis Fed President Narayana Kocherlakota, Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser.

The most significant departure from the lineup is Kansas City Fed President Thomas Hoenig, who had dissented at every FOMC decision in 2010.

Speaking of the direction of monetary policy, analysts at IHS Global Insight said now isn’t the time to make any changes to the Fed’s program of quantitative easing, which remains in its early stages.

“While the economy is improving, the rates of growth of output, prices and employment are still far below the ‘thresholds’ that would precipitate a policy change from the Fed,” said analysts at IHS Global Insight. “We expect the new FOMC members to generally support Bernanke's approach, with a possible dissent from Dallas Fed Chief Fisher, in which case he would carry the baton passed on by Kansas City Fed Chief Hoenig, who rotated off the FOMC at the end of 2010.”