Asian markets stuttered Tuesday on renewed concerns that the Federal Reserve will hike rates again, while ongoing worries about the Chinese economy added to the negativity.
The positive vibes that fuelled a rally through much of July have given way to nervousness that while US inflation is coming down, officials will keep tightening monetary policy to make sure they have prices under control.
Those concerns were magnified Monday when Fed Governor Michelle Bowman on Monday repeated her weekend comments that she wanted to see "evidence that inflation is on a consistent and meaningful downward path" and rates should be lifted again.
Talk of another increase has jolted the feel-good mood that came after the Fed's latest policy meeting, when it said it would be more data-dependent when making decisions -- which many took as a hint that no more rises were in store.
Still, New York Fed chief John Williams gave traders some optimism, telling the New York Times he thought "monetary policy is in a good place -- we've got the policy where we need to be".
In an interview published Monday, he added that it was "an open question" on whether rates needed to go even higher and stay restrictive for some time.
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But he said if inflation continued to soften then interest rates could start coming down next year or in 2025.
Analysts also warned that while the US economy continued to show resilience against more than a year of tightening, there was still a belief it would slip into recession.
"There is no way the Fed can do the level of tightening that it's done so aggressively and not have some damage," Kristina Hooper, of Invesco, told Bloomberg Television.
"That's why I believe it's going to be a bumpy landing."
Wall Street's three main indexes enjoyed a strong start to the week, with focus turning to the release of consumer price inflation due later in the week. A mixed jobs report on Friday left investors with little to gauge the Fed's next move.
In early Asian trade, Hong Kong and Shanghai dropped ahead of the release of Chinese trade data, which is expected to show another sharp drop in exports as the world's number-two economy struggles to recover.
A lack of follow-through on stimulus pledges from Beijing has also left traders frustrated.
There were also losses in Seoul, Wellington and Taipei, though Tokyo, Sydney, Singapore and Manila rose.
The prospect of the Fed lifting rates again boosted the dollar, which was up against the yen, sterling and the euro.
National Australia Bank's Tapas Strickland warned of another possible hurdle for stocks next month as the US government faces another federal shutdown if lawmakers do not agree a funding deal.
While the crisis -- similar to that seen in 2018-19 -- does not threaten a default, it could see the closure of key services, which Strickland said could play a role in the Fed's decision-making.
He pointed out that reports suggested Republicans were "emboldened by the ratings downgrade by Fitch Ratings, to cut spending and bring the deficit under control".
"For the market, this issue could gather steam just as we head towards the next (Fed) policy meeting in late September, and it could be a factor in the Fed's decision on rates.
"Previous government shutdowns have been a factor in reducing US Treasury yields."
Key figures around 0230 GMT
Tokyo - Nikkei 225: UP 0.3 percent at 32,358.10 (break)
Hong Kong - Hang Seng Index: DOWN 1.6 percent at 19,226.76
Shanghai - Composite: DOWN 0.5 percent at 3,252.37
Euro/dollar: DOWN at $1.0985 from $1.1006 on Monday
Pound/dollar: DOWN at $1.2758 from $1.2783
Euro/pound: UP at 86.11 from 86.07 pence
Dollar/yen: UP at 143.29 yen from 142.47 yen
West Texas Intermediate: FLAT at $81.96 per barrel
Brent North Sea crude: DOWN 0.1 percent at $85.29 per barrel
New York - Dow: UP 1.2 percent at 35,473.13 (close)
London - FTSE 100: DOWN 0.1 percent at 7,554.49 (close)