Asian investors trod cautiously Monday as they struggled to build on recent equity gains, with debate swirling around how big an expected US interest rate cut will be this week, while sentiment was being dragged by worries about the Chinese economy.
The yen edged to a new high since December ahead of the Federal Reserve decision on Wednesday and a policy meeting at the Bank of Japan two days later.
Data showing US inflation slowed more than expected last month to its weakest pace since February 2021 has sparked fresh talk that Fed officials will announce a bumper 50-basis-point cut and continue easing into the new year.
However, while bets on such a move have risen, some analysts warned that it could send a signal that decision-makers are worried about the economy, particularly after two readings showing the labour market was softening.
While bank officials have played their cards close to their chest, they have hinted that they are willing to discuss a bigger cut, while former New York Fed chief Bill Dudley said he thought "there's a strong case for 50".
Michael Krautzberger at AllianzGI said: "The Fed, like other central bankers, are now focused on economic growth rather than inflation risks and becoming increasingly worried about being behind the curve on policy -- cutting rates too late to avert a recession or sharper growth slowdown.
"Therefore, in our view, the risks of larger rate cuts at subsequent meetings this year cannot be discounted, especially if labour market activity deteriorates faster than currently expected and inflation continues to head towards target."
All three main indexes on Wall Street pushed higher Friday, with the Dow and S&P 500 within a whisker of their record highs.
But Asian investors were unable to extend the rally, with Hong Kong, Singapore and Wellington down but Sydney, Taipei and Manila edging up.
Trade was muted by holidays in Tokyo, Shanghai, Jakarta and Seoul.
On currency markets the yen hit 140.43 per dollar, its strongest level since the end of December, while gold remained at all-time highs after hitting a record $2,586.10 per ounce Friday.
Traders are keeping tabs on developments in China after more weak data on credit, retail sales, industrial production and house prices stoked concerns about the state of the world's number two economy.
The figures "collectively add to concerns that policy measures announced in recent weeks and months have so far failed to have any measurable impact in lifting economic growth thus far in the third quarter after the weak second quarter performance", said National Australia Bank's Ray Attrill.
He added that investors will be keenly watching the government's upcoming Politburo meeting -- the date of which has yet to be set.
In light of the latest batch of disappointing figures, the central bank outlined plans to support the economy, saying it will "make maintaining price stability and pushing for the mild rebound in prices an important consideration for monetary policy and meet reasonable financing demand for consumption in a more targeted way".
The Fed's decision is set to be followed by the BoJ on Friday, with most analysts expecting it to hold rates after a surprise hike at the end of July sparked turmoil on markets.
"A consecutive hike would likely be seen as too aggressive, especially given criticism that the BoJ's hawkish stance contributed to global market turbulence in early August," said IG analyst Tony Sycamore.
"That said, stronger-than-expected inflation and wage growth in Japan over the past month have given the BoJ confidence in a wage-price cycle that could keep inflation above two percent, paving the way for more policy tightening."
Hong Kong - Hang Seng Index: DOWN 0.6 percent at 17,271.92
Tokyo - Nikkei 225: Closed for a holiday
Shanghai - Composite: Closed for a holiday
Dollar/yen: DOWN at 140.53 yen from 140.76 yen on Friday
Euro/dollar: UP at $1.1088 from $1.1079
Pound/dollar: UP at $1.3141 from $1.3125
Euro/pound: DOWN at 84.37 pence from 84.40 pence
West Texas Intermediate: UP 0.5 percent at $68.98 per barrel
Brent North Sea Crude: UP 0.4 percent at $71.86 per barrel
New York - Dow: UP 0.7 percent at 41,393.78 (close)
London - FTSE 100: UP 0.4 percent at 8,273.09 (close)
