MSCI’s Asia Pacific Index rose about 0.8%, led higher by Japanese stocks, with the Topix benchmark gaining the most in a year. Shares in Hong Kong fell while onshore equities pared gains after a private survey showed China’s manufacturing activity contracted. S&P 500 futures edged lower after the index rebounded on the final day of October. 

Meanwhile, China’s central bank withdrew cash from the financial system, suggesting it sees Tuesday’s abrupt surge in short-term borrowing costs as a temporary disruption. 

The yield on the 10-year Japanese bond inched higher to near 1% after the central bank said it will take a more flexible approach to controlling rates on 10-year government debt.   

Treasury 10-year yields ticked marginally lower after rising in the previous session. Traders are taking the latest US economic data in stride as they await the Federal Reserve’s interest rate decision, which they expect to be another hold. Focus is also on the US government’s new borrowing plan, due hours ahead of the Fed’s announcement.

The BOJ loosened its grip on bond yields on Tuesday, in a move that appeared to fall short of investors’ hopes for a clearer sign of progress toward policy tightening. The currency saw its biggest one-day drop since April, sending it to a new year-to-date low and toward 152 to the US dollar, around the threshold that a year ago drove Japanese authorities to swoop in to prop up the currency. 

The yen then extended gains early on Wednesday after Japan’s chief currency official Masato Kanda said authorities see some moves that are not in line with fundamentals and are still on standby to intervene if needed. 

The Bloomberg Dollar Spot Index edged higher after advancing 0.4% in the previous session on the back of yen’s weakness. 

In economic news, US consumer confidence dropped to a five-month low in October while employment costs unexpectedly accelerated in the third quarter — underscoring a strong labor market that risks keeping inflation above the Fed’s target. 

The Fed should be and probably is worried about “the lagged effects of monetary policy,” Kristina Hooper, chief market strategist at Invesco, said on Bloomberg Television. “So there is a real risk that the Fed commits overkill if it hikes rates any more than it already has.”

Aside from the highly anticipated Fed decision, bond dealers are expecting the Treasury to unveil another round of increases this week to its note and bond auctions, though a sizable minority forecast the department will slow the pace of growth to avoid jolting yields higher.

“The main concern on parts of the bond market, particularly the traditional part, is really about the premium you’re getting — the term premium — to go out on the curve,” Russ Koesterich, global allocation fund portfolio manager at BlackRock, told Bloomberg Television. “And that is as much to do with the supply and changing demand dynamics as it does about inflation and the Fed. So you still want to be cautious on long-duration bonds.”

Investors are also looking for guidance from the ongoing earnings season to assess the outlook for profits and how companies are able to withstand headwinds like higher rates. US stocks slumped in October as disappointing showings from technology giants including Google parent Alphabet Inc. and Facebook owner Meta Platforms have weighed on sentiment.

In other markets, oil advanced after slumping in the first two days of the week, as a still-contained Israel-Hamas war caused attention to shift to global demand.