US inflation remains stubbornly above the Federal Reserve's long-term target of two percent despite falling sharply over the past 12 months, leading most Fed officials to predict last month that another hike is needed this year.
Federal Reserve Vice Chair for Supervision Michael Barr told a conference in New York on Monday that he expected rates would need to remain at a "sufficiently restrictive level" for "some time" to rein in inflation.
Barr's comments echo the views of the majority of his colleagues who recently lowered the number of rate cuts they expect in 2024, suggesting a longer period of high rates.
The Fed has raised its key lending rate 11 times since March 2022, lifting to a 22-year high.
With inflation well above its target, "the Fed is gonna keep rates high and we are expecting higher rates for longer", Xi Qiao, managing director for wealth management at UBS, told Bloomberg Television.
"That could be good for the US dollar, but more caution on the equity markets."
Wall Street ended mixed following a congressional deal to avert an immediate US government shutdown, with traders fuelling a bond market selloff.
"Any 'relief rally' from the US government spending deal appears to have been short-lived as bond markets witnessed a deepening selloff, leading to rising yields across the curve," said SPI Asset Management's Stephen Innes.
Treasury yields remained high with the yield on the 10-year US Treasury reaching the highest level since 2007 while the 30-year bond yield was at its highest since 2010.
Treasury bond yields are seen as a proxy for US interest rates and are closely watched.
"This yield surge reflects the market's response to messaging from the Federal Reserve, indicating the central bank's commitment to keeping borrowing costs elevated to combat inflation," Innes said.
"The global bond market selloff has gained momentum, partly driven by the reprieve from a US government shutdown," he said.
Hong Kong led the equities decline in Asia, falling nearly 2.7 percent as the market reopened following a holiday weekend.
Going against the flow, heavily indebted Chinese property giant Evergrande saw its stock jump as it resumed trading in Hong Kong days after it announced its boss was under criminal investigation.
Tokyo ended down 1.6 percent while Sydney, Taipei, Bangkok and Singapore were also well in the red. Manila and Kuala Lumpur were flat, with Jakarta the sole advancer.
Markets in mainland China and South Korea were closed for holidays.
In Europe, London was up 0.2 percent after reversing its opening losses while Frankfurt and Paris were down.
On forex markets, the yen was hovering close to the psychological level of 150 to the dollar.
The yen's weakness is fuelling speculation that the government may step in to prop up the currency, which has been hammered by the Bank of Japan's refusal to move away from its ultra-loose monetary policy even as the Fed considers lifting interest rates further.
- Key figures around 0820 GMT -
Tokyo - Nikkei 225: DOWN 1.6 percent at 31,237.94 (close)
Hong Kong - Hang Seng Index: DOWN 2.7 percent at 17,331.22 (close)
Shanghai - Composite: Closed for a holiday
London - FTSE 100: UP 0.2 percent at 7,527.72 points
Euro/dollar: UP at $1.0487 from $1.0484 Monday
Pound/dollar: DOWN at $1.2088 from $1.2094
Euro/pound: UP at 86.76 pence from 86.66 pence
Dollar/yen: DOWN at 149.82 yen from 149.84 yen
Brent North Sea crude: DOWN 0.2 percent at $90.52 per barrel
West Texas Intermediate: DOWN 0.1 percent at $88.77 per barrel
New York - Dow: DOWN 0.2 percent at 33,433.35 points (close)
mtp/pbt
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