Government shutdown and tariff fears are roiling year-end markets

A look at the day ahead in the US and global markets from Mike Dolan

Fears of a US government shutdown and new trade war threats cast another cloud over Wall Street as the year’s final full trading week came to a close, dampening what had been a stellar year for US stocks.

Already impacted by what was seen as a “tough cut” in interest rates from the Fed on Wednesday, as the central bank raised its 2025 interest rate and inflation expectations, the S&P 500 was in the red again late Thursday. Futures were down nearly 1%. % before the bell Friday.

A spending bill backed by Donald Trump failed in the US House of Representatives late Thursday, with dozens of Republicans challenging the president-elect, leaving Congress without a clear plan to avert a looming government shutdown that could cripple Christmas travel.

Government funding is scheduled to end at midnight on Friday. If lawmakers fail to extend that deadline, the U.S. government will begin a partial shutdown that would cut funding for everything from border law enforcement to national parks and cut the paychecks of more than two million federal workers.

“Congress should get rid of the ridiculous debt ceiling, or perhaps extend it through 2029. Without that, 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 levels since May, with the benchmark 10-year index approaching 4.60% — a rise of about 50 basis points in just two weeks.

Tracking rising yields, the dollar index hit a two-year high on Thursday.

As November inflation readings from the Fed’s preferred personal consumption expenditures measure were released on Friday, Treasury yields and the dollar eased slightly.

But the cost of buying insurance against a potential US sovereign default rose on Friday due to lockdown fears. Credit default swaps on six-month US Treasury bonds rose to a four-week high of 11 basis points, according to Standard & Poor’s Global.

The Japanese yen strengthened somewhat as data showed Japan’s core inflation rate accelerating, leading to continued speculation about a new year’s interest rate hike from the Bank of Japan.

Japan’s top financial officials also said on Friday that the government was “disturbed” by recent moves in the foreign exchange market, and was prepared to intervene if speculative moves were deemed excessive, as the yen resumed its rapid decline.

These warnings came as several central banks in emerging economies from Brazil to South Korea intervened in recent days to halt the dollar’s sharp rise.

The story continues