World stocks are heading for a 1 per cent loss on the week, drifting from recent two-month highs after US Federal Reserve officials fired more warning shots on interest rates, while the US bond yield curve priced for a recession.
The dollar and bond yields rose after St. Louis Fed President James Bullard said interest rates might need to hit a range from 5-5.25 per cent from the current level of just below 4.00 per cent to be "sufficiently restrictive" to curb inflation.
That was a blow to investors who had been wagering rates would peak at 5 per cent and saw Fed fund futures sell off as markets priced in more chance that rates would now top out at 5-5.25 per cent, rather than 4.75-5.0 per cent.
"The Fed has come back through their speeches and pushed back against the market narrative -- we are not going to see a pivot," said Arun Sai, senior multi-asset strategist at Pictet Asset Management.
Sai said the market was currently "running on fumes" and would switch focus to the real economy's response to rising rates, such as anecodatal signs of slowdown in the US labour market.
The MSCI world equities index edged up 0.17 per cent while US S&P futures were steady after the S&P 500 index dipped 0.3 per cent on Thursday.
European stocks gained 0.54 per cent, with banks rising nearly 1 per cent as the European Central Bank gears up to start the biggest withdrawal of cash from the euro zone's banking system in its history.
Banks are expected to repay about 500 billion euros in Targeted Longer-Term Refinancing Operations (TLTRO) loans. The ECB's announcement is expected at 1105 GMT.
Britain's FTSE gained 0.33 per cent, a day after finance minister Jeremy Hunt announced tax rises and spending cuts in an effort to reassure markets that the government was serious about fighting inflation.
British retail sales staged only a partial rebound last month after shops closed in September for the funeral of Queen Elizabeth, data showed on Friday, and they remained below their pre-pandemic level as soaring inflation hit spending power.
"Although the Bank of England is likely to continue hiking rates despite a slowdown in the economy, their peak will likely be lower than in the US," said Dean Turner, chief euro zone and UK economist at UBS Global Wealth Management.
US two-year yields crept back up to 4.48 per cent, retracing a little of last week's sharp inflation-driven drop of 33 basis points to a low of 4.29 per cent.
That left them 69 basis points above 10-year yields , the largest inversion since 1981 and an indicator of impending recession.
The dollar was flat at 106.65 on a basket of currencies, after touching a three-month trough of 105.30 early in the week.
The US currency was steady at 140.23 yen, but held above its recent low of 137.67. Sterling rose 0.3 per cent to $1.1904.
The euro held at $1.0357, having eased from a four-month peak of $1.0481 hit on Tuesday as some policymakers argued for caution on tightening.
ECB President Christine Lagarde will give a keynote speech later on Friday that may offer guidance on which way the majority at the bank may lean. MSCI's broadest index of Asia-Pacific shares outside Japan was steady.
Chinese blue chips dropped 0.45 per cent amid reports that Beijing had asked banks to check liquidity in the bond market after soaring yields caused losses for some investors.
There were also concerns that a surge in COVID-19 cases in China would challenge plans to ease strict movement curbs that have throttled the economy.
Japan's Nikkei slipped 0.1 per cent as data showed inflation running at a 40-year high as a weak yen stoked import costs.
Still, the Bank of Japan argues that inflation is mostly driven by energy costs outside of its control and that the economy needs continued super-easy policies.
Brent crude hit four-week lows on concerns about weakening demand in China and further interest rate rises by the Fed. Brent hit a low of $89.51 per barrel, down 0.2 per cent. US crude was steady at $81.67 a barrel.
Gold gained 0.1 per cent to $1,763 an ounce after hitting a three-month high of $1,786 early in the week.