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US equities are stuck in a holding pattern as trading volumes dry up following the holiday break, and Europe is largely absent from the action. Liquidity remains razor-thin, and market moves appear more about year-end housekeeping than aggressive positioning. With the calendar year winding down and little in the way of tier-one economic data, the market is content mainly to drift until something shakes it from its slumber—likely a late-year squeeze or perhaps a Trump-driven shift in global economic sentiment.

In the meantime, key rates tied to the US overnight funding market are creeping higher, despite the Federal Reserve’s best efforts to tame volatility. The Secured Overnight Financing Rate (SOFR), a key benchmark for one-day lending in the repo market, surged to 4.40% on December 24, up from 4.31%, according to the New York Fed. This move brings SOFR into alignment with the interest on reserve balances rate (IORB) of 4.40%, signalling that year-end balance sheet constraints are starting to weigh on overnight funding costs.

But here’s the kicker—this isn’t just your typical holiday bump. Funding costs are climbing due to this year’s ever-expanding US equity and derivative positions on banks' balance sheets. With these positions sitting at record highs, banks are struggling to fund them into year-end, putting added strain on the repo market. In a recent interview, New York Fed President John Williams cautioned that repo market volatility could mirror what was seen in late September, when funding costs surged, making it significantly more expensive for financial institutions to borrow cash for short-term liquidity needs.

As this funding noise fills the backdrop, investors are left to parse the mixed signals coming from the US labor market. Initial jobless claims dipped below 220,000 for the first time in a month, a potential sign of resilience in the labor market. However, the continuing claims—tracking those receiving ongoing unemployment benefits—rose by 46,000 to 1.91 million for the week ending December 14, significantly above expectations and the highest since November 2021, when the labour market was still working through the pandemic-induced downturn.

The rise in continuing claims and the uptick in long-term unemployment (those searching for jobs for 15 weeks or more) suggests that while the labour market is holding up, it’s far from as bulletproof as some headline numbers might imply. The long-term jobless rate is still hovering above 40%, the highest level outside of a recession, underscoring the ongoing structural issues in the US labour market. This mixed bag of data sets the stage for a volatile data-driven push and pull on the Fed’s policy stance well into Q1 2025 as the market assesses whether the economy is truly on solid footing or just treading water.

With year-end positioning ramping up and the pressure on the repo market intensifying, this is a pivotal stretch for markets. Investors will watch closely as the jobs data continues to inform the Fed’s next moves. At the same time, the broader market contemplates whether the tightening liquidity environment will lead to another liquidity crunch—much like the one seen in September—or whether the market can ride the coattails of a potential year-end rally.

Sometimes, it’s better to cut and run than face the dread of year-end funding, especially as the market waits for the next trigger—a Trump tariff tweet or a late-year squeeze.

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