Benchmark interest rates are rallying and equity futures are weaker after markets learned the British economy unexpectedly shrank in the fourth quarter of 2010.

An hour before the opening bell S&P 500 futures are 5.25 points lower at 1,283.50 and Dow futures are off by 25 points at 11,905. 

The yield is understandably flatter ahead of a $35 billion 2-year Treasury note auction. This is no surprise with debt issuance coming from the short end of the curve today. The 10-year TSY note is +12/32 at 93-29+ yielding 3.358%. The February delivery FNCL 4.5 is +5/32 at 102-07.  Current coupon yield spreads are wider into the Treasury rally.

Commodity prices are eaker. Light crude oil is 1.34% down at $86.69 per barrel, while gold prices are 0.34% lower at $1,329.70.

The International Monetary Fund released two reports today saying that financial uncertainties in Europe still pose a serious risk to the global economy.

“Downside risks to the recovery remain elevated,” one report said, according to the New York Times. “The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances.”

For the U.S., the IMF mentioned that housing prices would be hurt by the “shadow inventory” of homes in foreclosure. It recommended a revival of securitization markets, albeit ones that are “consistent with systemic stability.”

Also, the IMF called for mortgage goliaths Fannie Mae and Freddie Mac to be “privatized or converted to public utilities.” 

Key Events Today:

9:00 — The S&P Case-Shiller Home Price Index is expected to see prices fall for the second straight month in November. The back to back declines follow eight months of rising prices. Economists polled by Reuters look for the seasonally-adjusted index to drop 0.9% in the month, just less than the 1% slide a month before. Annually, prices should be down just 1.3%, suggesting a fair bit of stability considering the glut of houses still on the market.

“It is not the indication of another downward trend because existing housing demand improved significantly in the last quarter of the year,” said economists at BBVA. “Home prices are currently at favorable levels for consumers and attractive affordability ratios will play a role in attracting demand and reducing inventories of existing homes.”

10:00 — Consumer Confidence is expected to tick up to 54.7 in January from 52.5 in the final month of 2010. Some economists doubt the index will increase at all, as unemployment remains high and prices for food and gasoline have been rising in recent weeks. However, the consensus for the Conference Board index to move up along with stock prices and general economic growth.

“With stock prices rising and initial jobless claims falling, we think it will start to pick up this month, although gains will be limited as long as joblessness remains very high,” said economists at Nomura, adding that the current conditions component is closely correlated with the unemployment rate.

10:15 —  The Fed will purchase an estimated $6-8 billion in Treasuries maturing between 1/31/2015 and 6/30/2016.

1:00 — Treasury will auction $35 billion 2-year notes maturing on January 31, 2011.

9:00 —  President Barack Obama will give the State of the Union Address.  The President will talk about "what America needs to do to create jobs today, make America more competitive tomorrow, and win the future for our children and our country".

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