The Gray Market is just for worldbuilding, you can't actually buy anything from there. (It was planned to play a bigger role in a branching story path further down the line, but it was never added).
The smith sells ammo once you have the corresponding gun. (I guess I could've designed that interface in a better way...)
The City Hall battle is the area boss, so once you beat that, you're done with the area. If you absolutely can't beat it and want to back out, you could open Profile.yal (the save file) and change the first three lines to
then save it, close the editor, and load the file from the title screen. This will start you at the save station outside Ruruu Village. (All the bosses you beat in Suntown stays defeated) Hacking the savefile isn't the most elegant solution, but this old game of mine has a bunch of unfair situations where it can be a necessity... x3 (Suntown in general being one).
I'm not sure whether the trigger to prevent you from going back into Suntown is the first cutscene in Suntown or the last (and the source file and trigger list aren't on this computer, so I can't look it up at the moment), so you might wanna back up the current three first lines of the savefile before doing this (they correspond to room, x and y coordinates, respectively) so you can warp back in once you're ready.