An investor sits in front of a board showing stock information at a brokerage office in Beijing, China, December 7, 2018.
An investor sits in front of a board showing stock information at a brokerage office in Beijing, China, December 7, 2018. Reuters / Thomas Peter

Long-dated U.S. Treasury yields surged and global stock markets slid further on Friday as investors worried the Federal Reserve may not be able to curb inflation in the years ahead despite U.S. labor data showed decelerating wage growth in April.

Labor Department data on Friday showed the unemployment rate fell to its pre-pandemic low of 3.5% last month as job growth moderated and average hourly earnings eased to 5.5% from a year earlier.

But the data underscored the challenges the Fed and other central banks face as they battle rising inflation with China's lockdowns causing persistent supply chain disruptions and the war in Ukraine putting pressure on food prices.

The inflation outlook past the next two years is beginning to look cloudier for bonds, or at least for bond traders, said Jim Vogel, interest rate strategist at FTN Financial.

"We have taken into account, not necessarily the inability of the Fed to fight inflation, but an inflation problem that for right now is beyond central banks to calm for the rest of the decade. That's pretty bleak," Vogel said.

The yield on benchmark 10-year Treasury notes rose 5 basis points to 3.119%, a rate last seen in November 2018 after sharply rising from about 1.5% at the end of 2021.

The Fed hopes to slow inflation by tightening monetary policy. There is a risk that too much tightening could drag the economy into recession, so market volatility has increased.

Stocks on Wall Street fell in volatile trade that pushed the major indexes briefly into the green and on track for a fifth straight week of declines. The Nasdaq fell as much as 2.66%.

"The market is focused on the Fed being behind the curve and that's why the market is down," said Keith Lerner, chief market strategist and co-chief investment officer at Truist Advisory Services.

Fed funds futures priced in a roughly 75% chance of a 75 basis-point interest rate hike at next month's Fed policy meeting - even after Fed Chair Jerome Powell said Wednesday the U.S. central bank was not considering such a move. [FEDWATCH]

The pan-European STOXX 600 index fell 1.91% as regional shares chalked up their worst week in two months. MSCI's gauge of global equity performance shed 1.39% and emerging market stocks lost 2.61%.

On Wall Street, the Dow Jones Industrial Average fell 1.08%, the S&P 500 slid 1.14% and the Nasdaq Composite dropped 1.65%.

Russell Price, chief economist at Ameriprise Financial, said the unemployment report showed the U.S. labor market is solid.

"Over the last few months we have seen the month-over-month pace of average hourly earnings starting to decelerate somewhat," he said. "That's a positive indicator that this surge in hourly wages that we experienced may finally be easing."

The dollar slipped against a basket of currencies after two volatile days as investors focused on how aggressive the Fed will be in hiking rates.

The dollar index hit a 20-year high overnight on safe haven demand, the day after a sharp stock selloff driven by rising U.S. interest rates and as European currencies weakened on worries about growth in the region.

The dollar index rose 0.077%, with the euro up 0.07% to $1.0547. The yen weakened 0.35% at 130.56 per dollar.

The European Central Bank should raise its deposit rate back into positive territory this year, French central bank chief Francois Villeroy de Galhau said, indicating his support for at least three rate hikes in 2022. The Bank of England raised rates by 25 basis points on Thursday as expected, but two policy makers expressed caution about future rate hikes.

Oil prices climbed for a third straight session, shrugging off concerns about global economic growth as impending European Union sanctions on Russian oil raised the prospect of tighter supply.

U.S. crude futures rose $1.51 to settle at $109.77 a barrel and Brent settled up $1.49 at $112.39.

Gold rose on a weaker dollar but the prospect of aggressive rate hikes from the Fed put bullion on course for a third consecutive weekly decline.

U.S. gold futures settled 0.4% higher at $1,882.80 an ounce.

Bitcoin fell 1.64% to $35,933.47.

Germany's 10-year government bond yield rose to 1.082%, its highest since 2014.

Graphic- Correlations global stocks and bonds: