The focus on Syria in the coming week will be another factor fanning market volatility as investors debate the next step of the Fed.
President Barack Obama addresses the nation Tuesday to lay out his case for why the U.S. should launch a missile strike on Syria, after its government used chemical weapons on its citizens. A Senate vote on Syria could come midweek, and the House of Representatives should vote several days later.
In a month that was already expected to be eventful, Syria has moved to the front burner and has ramped up volatility across markets, not least of all the oil market. West Texas Intermediate jumped more than 2 percent Friday, to finish at $110.63 per barrel, its highest close since May 2011.
There is also a smattering of economic data, but nothing of the magnitude required to sway the Fed's thinking on whether it will wind down its $85 billion-a-month bond-buying program. The retail sales number Friday should be an important look at consumer spending, and traders will be watching weekly jobless claims to see if they remain at a six-year low.
"Syria could take a lot of our attention away from what we should be focused on," said Art Hogan of Lazard Capital Markets. "I think it's hard not to think that most of the economic data next week takes a backseat, as we watch Congress get back in session and we watch the resolution to use military action get voted on."
Markets are also debating what the Fed will do at its meeting Sept. 17 and 18, after Friday's mediocre August report of 169,000 nonfarm payrolls. Economists and strategists say the weak report suggests the Fed could now pare back less of its bond purchases than originally expected.
Mark Zandi, chief economist at Moody's Analytics, said Syria is a wild card and could also be a factor for the Fed.
"I think they desperately want to get it going," Zandi said of tapering. "The only thing that might derail it is if the bombing of Syria happens at the same time as their meeting."
Now, traders say a $10 billion to $15 billion tapering in September appears the likeliest scenario, and the probability of a September move by the Fed has fallen just slightly.
"We're going out at a two-year high on a closing basis on the 10-year note," said Peter Boockvar, chief market analyst at the Lindsey Group. "That just tells me the jobs number didn't change expectations on what the Fed will do. If they're going to do it, it is going to be $10 billion to $15 billion. … I think it comes down to what bonds have priced in and what stocks have priced in. … I think bonds have priced in a $15 billion taper, and stocks are still delusional."
Barry Knapp, head of U.S. equity portfolio strategy at Barclay's, said he expects the market to trade with typical volatility for September, historically the market's worst month. This year, instead of the Fed talking about stimulus, as it has done in the past three years, it is talking about reducing stimulus.
"That just changes the psychology and increases the probability of having a standard volatile September. I still think the stock market has additional downside to something below 1600," Knapp said. "I'm not surprised we got a little bounce this week. I definitely think this move is not complete and it won't be complete until the Fed's actual event, and then I think it will bottom pretty quickly. We're going to be stuck in a range for the balance of the year."
In the week ahead, the Treasury auctions $65 billion in notes and bonds, and at the same time, credit markets are expected to see the biggest corporate bond offering ever with $20 to $30 billion of Verizon bonds coming to market as early as Wednesday, according to IFR. Verizon is selling the bonds to buy the share of Verizon Wireless it does not own.
Following a week where Treasury yields zipped to two-year highs and the 10-year broke the psychological 3 percent level, the Treasury auctions are being closely watched to see if investors will be tempted by cheaper prices.
"Right now, it's going to be waiting for the Fed," said John Briggs, head of cross-asset strategy at RBS. "I think the markets are going to be a little jumpy. Fixed income is going to be jumpy for supply."
The Treasury auctions 3-year and 10-year notes and 30-year bonds Tuesday through Thursday. Briggs said the Verizon offering is in a sense competing with the government auctions. "A lot of people are going to be watching that Verizon deal because in this environment, the question is what's the ability to take down that size deal. What has to be done to get that deal completed. I think it's going to be a bellwether for the corporate bond market," he said.
The fixed-income markets will be watching Syria, but markets are also focused on the coming need for Congress to pass a budget resolution and deal with the debt ceiling, Briggs said. But the top concern is the Fed.
"We have these two uncertainties," he said. "How does Sept. 18 play out? And how do they communicate rising yields? How do they reconfirm their forward guidance? The efficacy of the forward guidance, when you're unsure who the next Fed chairman is going to be reduced." The Fed's guidance has been that it will not move to raise short-term rates until 2015.
But the market has also become nervous as it became clear in recent weeks that Fed Vice Chair Janet Yellen would probably not be the next chairman, as originally expected. That has added pressure to shorter-term rates, which have moved higher on speculation a different chairman could move to lift rates sooner than Ben Bernanke or Yellen, with whom he is closely aligned.
Fed head bargaining chip
Speculation in the past week also focused on how the Fed chairmanship could become a game piece in Obama's negotiations with Congress over Syria. The speculation was that the president would give up on trying to name his reportedly preferred candidate former Treasury Secretary Larry Summers to the post in exchange for buy-in on Syria. Yellen had been the clear favorite on Wall Street, but Obama has also said that former Fed vice chair Donald Kohn was a candidate. The same scenario circulated with Summers being bargained away for a deal on the debt ceiling.
(Read more: Syria and Obama's political conundrum)
But Knapp sees it differently. He thinks Republicans would like Summers, even though he is a Democrat, and would view him as much more hawkish than Bernanke. "He needs Republican votes," said Knapp of Obama. Summers, therefore, could be made the Fed chairman candidate to gain Republican support, Knapp said.
"For me, that's how Syria changes the calculus, and so far gasoline prices have not moved up enough to impact consumer spending," he said.
Briggs said yields are not likely to move much lower until Obama names a replacement for Bernanke. "Underlying the whole thing is the ongoing uncertainty about the Fed chairman, and until you alleviate that … and even if the Fed is really dovish, it's going to be hard to get back to below 2.7 percent until you get clarity on the Fed chairman."
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.
What to Watch
Congress returns for Fall session
11:00 am: San Francisco Fed President John Williams
3:00 pm: Consumer credit
President Obama addresses nation on Syria
7:30 am: NFIB small business survey
10:00 am: JOLTs survey
1:00 pm: $31 billion 3-year note auction
10:00 am: Wholesale trade
1:00 pm: $21 billion 10-year note auction
8:30 am: Initial claims
8:30 am: Import prices
1:00 pm: $13 billion 30-year bond auction
2:00 pm: Federal budget
8:30 am: Retail sales
8:30 am: PPI
9:55 am: Consumer sentiment
10:00 am: Business inventories