MSCI’s Asia Pacific Index fell after an earlier advance, with Japan and Hong Kong leading the losses. Shares in Hong Kong swung between gains and losses as traders weighed a surprise contraction in China manufacturing against upbeat holiday spending data. Chinese markets will reopen on Thursday after a five-day holiday.

A gauge of the dollar strength ticked lower and Treasuries edged up in Asia trading after selling across the curve on Monday, with yields on 30-year bonds climbing the most in 2023. Swap traders have slightly upgraded the odds the Fed will raise its policy rate by a quarter point on Wednesday, but now only expect rate cuts to happen in the later part of this year.

Investors will be closely listening to the Fed’s tone for any hawkish surprise, according to Julia Wang, a global market strategist at JPMorgan Chase & Co’s private banking unit in Hong Kong. “So much rate cuts have been priced in so soon and maybe that doesn’t happen in the near term,” Wang said on Bloomberg Television. “Maybe we’ll have a little bit of a correction and that means that dollar could strengthen.”

Australian bonds fell and the currency steadied while traders awaited a policy decision where the nation’s central bank is likely to extend a pause in rate increases following a deceleration in inflation.

China’s official manufacturing purchasing managers’ index fell to 49.2 in April, according to data released on Sunday, feeding concerns that the economy may struggle to sustain growth momentum. Still, initial data from the Golden Week holiday showed strong travel, shopping and casino spending. 

Payment misses by Chinese developers added to the cloudy outlook, with a gauge of real estate companies dropping 1.8%.

Meanwhile, US Treasury Secretary Janet Yellen told legislators on Monday that the nation risked default as soon as 1 June. That came amid a high-stakes game of chicken in Washington over the debt limit.

“We see only a temporary rise in selected Treasury bill yields as the date nears when the US Treasury might run into trouble making payments or need to prioritize debt payments over other obligations,” a team of strategists at BlackRock Investment Institute, including Jean Boivin, wrote in a note. “Still, we could see market volatility and risk assets come under pressure as in past episodes.”

In the US investment-grade bond market, issuance jumped to more than $22-billion in one of the busiest sessions of 2023. Several borrowers are piling in after exiting their earnings blackouts. Among notable firms tapping the market: Meta Platforms raised $8.5-billion, Comcast priced a $5-billion deal and Hershey sold $750-million in bonds.

Elsewhere, oil gained while gold was little changed. BM/DM