Morning Bid: Government shutdown and tariff fears jar year-end markets

A look at the day ahead in U.S. and global markets from Mike Dolan

U.S. government shutdown fears and fresh trade war threats cast another cloud over Wall Street as a bruising final full trading week of the year comes to a close and dampens what had been a stellar year for U.S. stocks.

Already sideswiped by what was seen as a 'hawkish cut' in Federal Reserve interest rates on Wednesday, where the central bank lifted both its 2025 policy rate and inflation projections, the S&P 500 was in the red again late Thursday and futures were down almost 1% before Friday's bell.

A spending bill backed by Donald Trump failed in the U.S. House of Representatives late Thursday as dozens of Republicans defied the President-elect, leaving Congress with no clear plan to avert a fast-approaching government shutdown that could disrupt Christmas travel.

Government funding is due to expire at midnight on Friday. If lawmakers fail to extend that deadline, the U.S. government will begin a partial shutdown that would interrupt funding for everything from border enforcement to national parks and cut off paychecks for more than 2 million federal workers.

"Congress must get rid of, or extend out 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 almost 50 basis points in just two weeks.

Tracking the climb in yields, the dollar index hit its highest in two years on Thursday.

With November inflation readings from the Fed's favored personal consumption expenditures gauge due out on Friday, Treasury yields and the dollar stepped back a notch.

But the cost of buying insurance against a potential U.S. sovereign default crept higher on Friday due to the shutdown fears. Credit default swaps on six-month U.S. bills nudged up to a four-week high of 11 bps, according to S&P Global.

Japan's yen strengthened somewhat as data showing accelerating core Japanese inflation kept speculation of a new year interest rate hike from the Bank of Japan alive.

Top Japanese finance officials also said on Friday the government is "alarmed" by recent foreign exchange moves and is ready to intervene if speculative moves were deemed excessive, as the yen resumed its rapid downturn.

The warnings came as many emerging economy central banks from Brazil to South Korea intervened in recent days to halt the dollar's steep rise.