(Updates to afternoon, adds commentary)
* Fed looms over broader markets, dollar rises
* Oil falls on demand concerns, U.S. rail strike averted
* Treasury yields climb while oil gold tumbles
By Sinéad Carew
NEW YORK, Sept 15 (Reuters) - Wall Street indexes were firmly in the red after a choppy start to Thursday's session while bond yields rose as investors digested economic data that provided the Federal Reserve little reason to ease its aggressive interest rate hiking cycle.
Oil futures tumbled more than 3% on demand concerns and after a tentative agreement that would avert a U.S. rail strike, as well as continued U.S. dollar strength with expectations for a large U.S. rate increase.
Economic data showed U.S. retail sales unexpectedly rebounded in August as Americans ramped up purchases of motor vehicles and dined out more while taking advantage of lower gasoline prices. But data for July was revised downward to show retail sales declining instead of flat as previously reported.
Separately the Labor Department said initial claims for state unemployment benefits fell for the week ended Sept. 10 to the lowest level since the end of May.
Investors are widely expecting an aggressive rate hike after the Federal Open Market Committee (FOMC) meeting next week, but nervously awaiting hints from Fed Chair Jerome Powell about future policy moves, said Quincy Krosby, chief global strategist at LPL Financial.
"The market remains choppy knowing that there's a Fed meeting next week. Even though participants agree that it'll be a 75 basis points rate hike, it's what the statement adds to previous commentary and what Chairman Powell says in his press conference" that have them worried, Krosby said.
The Dow Jones Industrial Average fell 116.43 points, or 0.37%, to 31,018.66; the S&P 500 lost 37.85 points, or 0.96%, to 3,908.16; and the Nasdaq Composite dropped 150.15 points, or 1.28%, to 11,569.53.
Moves across stocks, bonds and currencies on Thursday were showing a market "increasingly understanding the Fed is going to hike more aggressively next week," said Scott Ladner, chief investment officer at Horizon Investments in Charlotte, North Carolina.
Referring particularly to the still strong labor market, Ladner said "economic numbers released today are tying a bow on the situation."
The pan-European STOXX 600 index closed down 0.65% while MSCI's gauge of stocks across the globe was last down 0.83%.
Treasury yields rose with the two-year hitting fresh 15-year highs, after data on retail sales and jobless claims showed a resilient economy that gives the Fed ample room to aggressively hike interest rates.
Benchmark 10-year notes were up 4.5 basis points to 3.457%, up from 3.412% late on Wednesday. The 30-year bond last fell 6/32 in price to yield 3.4797%, compared with 3.469%. The 2-year note last fell 5/32 in price to yield 3.8688% up from 3.782%. "In this vicious cycle where the data continues to remain resilient, that would imply a Fed that would likely stay the course and continue to tighten policy," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.
In currencies the dollar was slightly higher against the yen while the Swiss franc hit its strongest level against the euro since 2015.
The dollar index rose 0.109%, with the euro was up 0.14% to $0.9991. The Japanese yen weakened 0.19% versus the greenback at 143.43 per dollar, while Sterling was last trading at $1.147, down 0.56% on the day.
Before the tentative agreement, fears of a U.S. railroad worker strike had supported oil prices due to supply concerns on Wednesday. In addition, the International Energy Agency (IEA) said this week that oil demand growth would grind to a halt in the fourth quarter.
U.S. crude settled down 3.82% at $85.10 per barrel while Brent finished at $90.84, down 3.46% on the day.
Gold dropped to its lowest level since April 2021, hurt by elevated U.S. Treasury yields and a firm dollar, as bets of another hefty Fed rate hike eroded bullion's appeal.
Spot gold dropped 2.0% to $1,662.46 an ounce. U.S. gold futures fell 2.02% to $1,662.30 an ounce.
(Additional reporting by Marc Jones in London, Stefano Rebaudo in Milan, Tom Westbrook in Singapore and Wayne Cole in Sydney; Editing by Kirsten Donovan and Jonathan Oatis)