Mike Dolan's look at the day ahead in US and global markets
Fears of a US government shutdown and threats of a new trade war are casting another cloud over Wall Street as the last full trading week of the year comes to a close and dampening what has been a stellar year for US stocks.
Already sidelined by what was seen as a 'hawkish cut' in interest rates by the Federal Reserve on Wednesday, where the central bank raised its 2025 policy rate and inflation projections, the S&P 500 was again in the red late on Thursday and futures were down nearly 1% before Friday's bell.
A spending bill backed by Donald Trump failed in the US House of Representatives late Thursday as dozens of Republicans challenged the President-elect, leaving Congress with no clear plan to avoid a fast-approaching government shutdown and could disrupt Christmas travel.
Government funding is due to end at midnight on Friday. If lawmakers fail to extend that deadline, the US government will begin a partial shutdown that would cut off funding for everything from border enforcement to national parks and cut paychecks for more than 2 million of federal employees.
“Congress must get rid of, or extend to, perhaps, 2029, the ridiculous Debt Ceiling. Without this, we should never make a deal,” Trump said on social media.
The combination of Fed hawkishness and government funding concerns sent long-term Treasury yields to their highest since May, with the 10-year benchmark coming close to 4.60% – a climb of nearly 50 basis points in just two weeks.
Tracking the rise in yields, the dollar index hit a two-year high on Thursday.
With November inflation readings from the Fed's preferred personal consumption expenditure gauge due out on Friday, Treasury yields and the dollar retreated significantly.
But the cost of buying insurance against a potential sovereign default in the US rose on Friday due to shutdown fears. Credit default swaps on US six-month bills rose to a four-week high of 11 bps, according to S&P Global.
The Japanese yen strengthened somewhat as data showing an acceleration in Japan's core inflation kept alive speculation about a new year interest rate hike from the Bank of Japan.
Japan's top finance officials also said on Friday that the government was “alarmed” by recent foreign exchange moves and was ready to intervene if speculative moves were deemed excessive, as the yen resumed its rapid decline.
The warnings came as many central banks in emerging economies from Brazil to South Korea intervened in recent days to stem the dollar's steep rise.