This holiday-shortened trading week will bring limited market activity, with US markets closing early at 1 PM Eastern on Christmas Eve and fully closed on December 25th. European markets will be shut on December 25th and 26th, while Japan and China will remain open, offering some global trading opportunities. Key focus will be on Treasury auctions for 2-, 5-, and 7-year notes, following weak results in recent weeks that have contributed to rising yields. The 10-year Treasury yield is targeting resistance at 4.75%, while the 2s/10s curve could steepen further, possibly narrowing to 15 basis points. Friday’s market volatility was driven by options expiration and a negative gamma environment, as the S&P 500 reversed at its 10-day moving average and closed near the 50-day, while the Nasdaq 100 saw a bearish engulfing pattern that may indicate a potential trend reversal. Expect thinner liquidity this week, which could amplify stock market and bond market moves.

Last week’s PCE inflation report aligned with the Fed’s 2.8% year-end target but had minimal market impact, as Fed funds swaps and two-year inflation expectations remained steady. The US dollar index showed resilience but softened Friday due to yen volatility and a euro rebound. Funding pressures have eased, with BTIC January contracts retreating from recent highs. As we approach year-end, watch the Fed’s reverse repo and standing repo facilities, which play a key role in managing liquidity and controlling short-term interest rates. With global markets largely subdued, these facilities could signal financial stress or volatility. Traders should remain cautious of potential equity market swings and sharp moves in Treasury yields as year-end trading dynamics unfold.

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