US STOCKS-Wall St indexes hit one-week lows as economic data clouds rate-cut outlook

By Niket Nishant and Sukriti Gupta

Sept 25 (Reuters) - Wall Street's main indexes slumped to their lowest in a week on Thursday, as fresh economic data tempered optimism around further interest rate cuts, indicating a sharp shift in sentiment across a market betting on aggressive easing.

A split among Federal Reserve policymakers, with some pushing for aggressive cuts to safeguard the labor market and others advocating caution, also injected a dose of uncertainty.

The pullback underscores the market's sensitivity to even modest shifts in economic indicators, particularly after a September rally that defied the month's typical seasonal weakness.

Initial claims for state unemployment benefits dropped 14,000 to a seasonally adjusted 218,000 for the week ended September 20, data from the Labor Department showed. Economists polled by Reuters forecast 235,000 claims for the latest week.

"There may be cracks in the labor market, but if today's data is any indication, they haven't widened recently," said Chris Larkin, managing director, trading and investing, at brokerage firm E*Trade.

Investors scaled back expectations of a 25-basis-point rate cut in the Fed's October meeting to 83.4%, from about 92% on Wednesday, according to the CME FedWatch Tool.

The central bank had lowered rates by 25 bps last week in its first cut since December, and had signaled more reductions ahead.

But Chicago Fed President Austan Goolsbee said on Thursday he was uneasy with cutting rates too quickly, flagging risks about inflation flaring up.

At 11:37 a.m. ET, the Dow Jones Industrial Average .DJI fell 54.57 points, or 0.12%, to 46,066.71. The S&P 500 .SPX lost 26.31 points, or 0.40%, to 6,611.66, while the Nasdaq Composite .IXIC was down 85.53 points, or 0.38%, at 22,414.29.

IBM shares IBM.N rose 5.6% after the company unveiled a partnership with HSBC HSBA.L, capping losses on the Dow.

The S&P 500 technology .SPLRCT stocks were flat, while the broader semiconductor .SOX index dipped 0.3%.

CarMax KMX.N slid to its lowest in more than five years, becoming the biggest loser on the S&P 500, after the used-car retailer reported lower second-quarter profit. Its shares were last down 20%.

Intel INTC.O rose 6.7%, a day after Bloomberg News reported that the chipmaker has approached Apple AAPL.O about securing an investment.

Brokerage firm Seaport Research Partners upgraded Intel's stock to "neutral" from "sell".

Investors are now focused on Friday's release of the Personal Consumption Expenditures index, the Fed's preferred inflation measure, which could shape expectations for the path of interest rates.

"I think it's going to fall within the range of normalcy. I think we see rates come down another 100 or so basis points over the next 18 months and we get to a very sweet spot in the economy," said Frank Sorrentino, CEO of ConnectOne Bank CNOB.O.

A potential government shutdown in Washington, where budget negotiations have so far failed to yield an agreement, has also aggravated the worries.

Declining issues outnumbered advancers by a 2.9-to-1 ratio on the NYSE and by a 2.8-to-1 ratio on the Nasdaq.

The S&P 500 posted 11 new 52-week highs and 15 new lows, while the Nasdaq Composite recorded 41 new highs and 69 new lows.