U.S. stocks and Treasuries slumped as Federal Reserve officials hammered home their resolve to remain persistent in their fight against inflation and warned of more pain to come.  

The S&P 500 and the tech-heavy Nasdaq 100 declined for the second straight session. Commodities from oil to copper fell while the dollar snapped a two-day drop.

U.S. 10-year Treasury yields climbed after St. Louis Fed President James Bullard said policymakers should increase interest rates to at least 5 per cent to 5.25 per cent to curb inflation. He also warned of further financial stress ahead. 

With inflation only starting to ease and a gauge of US retail sales increasing at the fastest pace in eight months, Fed speakers in recent days have emphasized that they need to go further to extinguish prices pressures. Bullard’s comments came a day after San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table.” Their hawkish tone was echoed by Minneapolis Fed President Neel Kashkari on Thursday afternoon.

“The takeaway is that the Fed is following the same playbook they have now for a long time,” said Johan Grahn, head of ETFs at Allianz Investment Management. Fed Chair Jerome Powell persistently reiterates his hawkish stance to keep markets at bay, so the rally after softer inflation data was not what central bank officials wanted to see, he said.

“It’s a game of chicken between basically the economy, the markets and the Fed right now,” Grahn said. “And most people I think would be wise to believe that the Fed might win in the end.”

On Thursday, fresh data showing weekly jobless claims came in below the forecast further underscored the strength of the labor market. U.S. mortgage rates posting their biggest weekly decline since 1981 briefly improved sentiment, even though Freddie Mac’s chief economist said there’s a long road ahead for the housing market.

European Central Bank policy makers too are said to be mulling a smaller 50 basis-point rate hike next month, signaling their concern for the economy and pushing the euro lower. 

The pound dropped after Chancellor Jeremy Hunt outlined a £55 billion (US$65 billion) package of tax rises and spending cuts even as the economy slid into recession. Gilt yields rose.

Key events this week:

• U.S. Conference Board leading index, existing home sales, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.3 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.2 per cent
• The Dow Jones Industrial Average was little changed
• The MSCI World index fell 0.8 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.3 per cent to US$1.0368
• The British pound fell 0.4 per cent to US$1.1863
• The Japanese yen fell 0.5 per cent to 140.19 per dollar

Cryptocurrencies

• Bitcoin rose 0.9 per cent to US$16,682.04
• Ether fell 0.4 per cent to US$1,200.56

Bonds

• The yield on 10-year Treasuries advanced eight basis points to 3.77 per cent
• Germany’s 10-year yield advanced two basis points to 2.02 per cent
• Britain’s 10-year yield advanced five basis points to 3.20 per cent

Commodities

• West Texas Intermediate crude fell 4.3 per cent to US$81.95 a barrel
• Gold futures fell 0.7 per cent to US$1,763.50 an ounce