Investing.com -- Wall Street is seen trading lower Friday ahead of the release of the Federal Reserve's favorite inflation gauge. The potential for a US government shutdown has also hit sentiment, while Donald Trump has threatened the European Union with tariffs, potentially igniting a trade war.
1. Core PCE index looms large
The world’s major central banks have made their monetary policy decisions for the year, which leaves one major piece of economic data to emerge Friday before investors can settle down for the holiday break - the core Personal Consumption Expenditures price index, the Fed’s preferred gauge of inflation.
Upside risks to inflation are back on the Fed's radar, with US consumer prices increasing by the most in seven months in November, and the potential for the new Donald Trump administration to authorise trade and tax policies that many see as inflationary.
The Federal Reserve responded to this by cutting its forecast for additional rate cuts in 2025 to two, from four in September, earlier this week, as it sanctioned another reduction of 25 basis points.
However, the hawkish nature of the Fed’s comments suggest the likelihood has shifted towards fewer or potentially no further reductions next year, meaning that a stronger than expected rise in the core PCE index could have an outsized impact on markets.
The November core PCE index is expected to rise 2.9% on an annual basis, up from 2.8% the prior month, while the monthly figure is seen climbing 0.2%, a slip from 0.3% in October.
2. Futures slip on potential government shutdown
US stock futures retreated Friday ahead of the release of the Federal Reserve’s favorite inflation, with investors fretting over a potential government shutdown.
By 04:50 ET (08:50 GMT), the Dow futures contract was down 145 points, or 0.4%, S&P 500 futures dropped 27 points, or 0.5%, and Nasdaq 100 futures fell by 165 points, or 0.8%.
Sentiment has been hit by the failure of a Trump-endorsed Republican measure to fund the government for three months and avert a government shutdown failed on Thursday. Without a deal, a partial shutdown is slated to start later Friday.
The focus is also on the release of the Fed’s preferred inflation gauge, the core personal consumption expenditures price index. This comes just a few days after the Federal Reserve indicated a slower pace of rate cuts in 2025, potentially weighing on economic activity.
The three main stock indices are on course for sharp weekly losses, with the S&P 500 and Dow Jones Industrial Average down more than 3% week to date, while the NASDAQ Composite is off more than 2%.
The University of Michigan’s consumer sentiment index is the main economic data release, aside from the core PCE, while stocks in focus include delivery giant FedEx (NYSE:FDX) and sportswear retailer Nike (NYSE:NKE).
3. US government shutdown draws near
A partial shutdown of the US government has drawn closer after a spending bill backed by Donald Trump failed in the US House of Representatives late Thursday.
Republican leaders had drawn up this new agreement after a prior bipartisan deal, supported by House Speaker Mike Johnson, had already been torpedoed by President-elect Donald Trump.
However, members of the party's right flank refused to support a package that would increase spending, potentially adding trillions more to the federal government's $36 trillion in debt.
Government funding is due to expire at midnight on Friday. If lawmakers fail to extend that deadline, the US government will begin a partial shutdown that could stop the pay for more than 2 million federal workers.
Goldman Sachs estimates that each week of a shutdown would reduce quarterly GDP growth by 0.15 percentage points, with an equivalent rebound once the government reopens.
4. Trump threatens EU with tariffs
A trade war between the US and the European Union became more likely Friday after US President-elect Donald Trump threatened the trading bloc with tariffs unless it closes its trade gap with the US by purchasing the country’s oil and gas.
"I told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas," Trump said in a post on Truth Social.
"Otherwise, it is TARIFFS all the way!!!," he added.
Trump has made a number of threats of sweeping tariffs on US trading partners, including China, Mexico and Canada, and the European Union appears to be next in his crosshairs.
The US was the biggest recipient of EU goods in 2023, accounting for 19.7% of its exports, according to US figures, with the country’s goods and services trade deficit with the European Union at $131.3 billion in 2022.
5. Oil heads for weekly losses
Crude prices fell Friday, on track for hefty weekly losses, as a stronger dollar and persistent concerns over slowing demand weighed.
By 03:50 ET, the US crude futures (WTI) dropped 2.3% to $68.97 a barrel, while the Brent contract fell 0.6% to $72.47 a barrel.
The benchmarks are on course for weekly losses of around 3% after the dollar soared to a two-year high in the wake of the Federal Reserve turning hawkish about cutting interest rates in 2025.
A stronger dollar makes oil more expensive for holders of other currencies, while a slower pace of rate cuts could dampen economic growth and trim oil demand.
On the demand front, limited details on more stimulus measures in China and signs of cooling US fuel demand also weighed.