Asian markets slipped on Wednesday after Wall Street fell the most since June 2020, with a report showing inflation maintained a surprisingly strong grip on the US economy.

Most regional benchmarks fell more than 2%, but were flat. US futures rose slightly, with contracts for Dow Jones Industrialists and the S&P 500 rising 0.2%. European futures were lower.

A report on Tuesday showed US inflation slowed to just 8.3% in August, instead of the 8.1% expected by economists. That dashed hopes that inflation would return to more normal levels after peaking at 9.1% in June, allowing the Federal Reserve to moderate its interest rate hikes.

Tensions between the United States and China also weighed on sentiment. Chinese leader Xi Jinping and Russian President Vladimir Putin are due to meet later in the week, underscoring the countries’ warming ties as the West continues its sanctions against Moscow for its invasion of Ukraine.

The Thursday meeting in Samarkand, Uzbekistan, on the sidelines of a summit of a security pact dominated by Moscow and Beijing, testifies to the strong ties between the former communist rivals now locked in a rivalry with the United States

In the meantime, the United States is reportedly considering new sanctions against Beijing aimed at deterring any aggression against Taiwan, a self-governing island democracy that China claims as its own territory.

Hong Kong’s Hang Seng index lost 2.6% to 18,831.88 and the Shanghai Composite index fell 0.9% to 3,234.18.

The benchmark Tokyo Nikkei 225 lost 2.2% to 27,991.82, while Sydney’s S&P/ASX 200 fell 2.4% to 6,839.50. In Seoul, the Kospi lost 1.5% to 2,414.26.

On Tuesday, the Dow lost more than 1,250 points and the S&P 500 fell 4.3%. Tuesday’s warmer-than-expected inflation report

The S&P 500 fell 4.3% to 3,932.69. The Dow Jones fell 3.9% to 31,104.97 and the Nasdaq composite closed down 5.2% to 11,633.57.

Bond prices also fell sharply, driving up their yields,

The two-year Treasury yield, which tends to track Fed stock expectations, climbed to 3.74% from 3.57% late Monday. The 10-year yield, which helps dictate the direction of mortgages and other loan rates, rose to 3.42% from 3.36%.

Traders brace for the Federal Reserve to eventually raise interest rates more than expected to fight inflationwith all the risks for the economy that entails.

Most of Wall Street entered the day thinking the Fed would raise its key short-term rate by three-quarters of a percentage point at its meeting next week, then scale back the magnitude of its rate hikes until at the end of this year, potentially stable until early 2023.

Traders now see a one in three chance that the Fed will raise the benchmark rate by a full percentage point next week, four times more than usual. No one in the futures market expected such a rise a day earlier.

The Fed has already raised its benchmark interest rate four times this year, the last two increases by three-quarters of a percentage point. The federal funds rate is currently in a range of 2.25% to 2.50%.

Higher rates hurt the economy by making it more expensive to buy a house, car, or anything else usually bought on credit. Mortgage rates have already reached their highest level since 2008, creating difficulties for the housing industry. The hope is that the Fed can successfully walk the tightrope of slowing the economy enough to quell high inflation, but not so much as to create a painful recession.

Tuesday’s data cast doubt on hopes for such a “soft landing”. Higher rates also hurt the prices of stocks, bonds and other investments.

Expectations of a more aggressive Fed also helped the dollar add to its already strong gains for this year. The dollar surged against other currencies largely because the Fed raised rates faster and with wider margins than many other central banks.

This is particularly true for Japan, where the benchmark rate remains at minus 0.1%. The dollar bought 144.56 Japanese yen, against 144.57 yen on Tuesday evening. The euro rose to 0.9983 cents from 0.9969 cents.

Benchmark U.S. crude added 22 cents to $87.53 a barrel in electronic trading on the New York Mercantile Exchange. It lost 47 cents to $87.31 on Tuesday. Brent, the international price standard, climbed 15 cents to $93.32 a barrel.