Tuesday's retail sales moved the markets. Some might ask: why?
Stocks rose midday as Atlanta Fed President Dennis Lockhart said that the central bank may start tapering at one of the next three meetings. Still, he characterized the economy as "uneven" and said recent data does not present a clear economic picture.
Regardless: Mr. Lockhart is not a voting member of the FOMC. It's more instructive to look at the performance of the stock and bond markets in the wake of this morning's retail data.
Consumer sales for July, when taking into account the June revisions, were basically in-line, but were still at their highest levels this year.
The figures number are certainly good enough to keep the Fed taper talk alive for the September meeting.
Market action would suggest this being priced in: ten-year Treasury bond yields have risen from roughly 2.66 percent to 2.71 percent, the highest level in over a month. And while retail sales are not normally a big market mover, these are not normal markets.
The key is that the retail figures are the first production numbers we have had for July, the start of the third quarter. True, we have already had ISM Services and Manufacturing data, but those are not production numbers; they are only sentiment indicators.
Investors are eagerly combing through any data for the third quarter for signs that the Fed may, or may not, begin its tapering of bond purchases in September.
The default belief among the majority of traders is that we will need to see a notable decline in economic data for the Fed to NOT begin tapering in September.
What this means for stocks: the reaction to the modest retail sales report indicates that stocks can expect a choppy ride for the next month, heading into the FOMC meeting September 17 and 18th.
Here's the issue: it's not a question of whether there will be a taper; traders are now wondering how large the cutback will be. The working assumption is bond purchases will go from $85 billion to $65 billion. However, there were traders this morning saying the taper could go down even more if the economic data continues to be "good enough," i.e. at or above consensus.
This seems unlikely: Bernanke and company will most likely want to err on the side of caution, as Lockhart emphasized today.
One other issue: the current split in bond purchases is $45 billion bonds, and $40 billion mortgage backed securities. How much the Fed will take from each as part of the taper influences stocks. For example, home building stocks are among the weakest performers today on concerns that a decline in purchases of mortgage backed securities will raise mortgage rates.
We will have additional production numbers: July Industrial Production will be out Thursday. The next non farm payrolls report will be out September 6th. That will be the key: if the August jobs report is considerably weaker than the disappointing July report, the Fed might be hard pressed to argue that the job market is showing sustained improvement.
—By CNBC's Bob Pisani