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Data will be the key as Fed meeting starts

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As the Federal Reserve begins its two-day policy meeting Tuesday, markets will get a look at how consumers behaved just before the government shut down.

Economists expect September's retail sales to be up 0.1 percent, when the numbers are released at 8:30 a.m. ET. The report is one of many that were delayed when the government shut down for 16 days starting Oct. 1.

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"We know car sales fell a lot in September, so retail sales could be slightly negative," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. "If the consumer is two-thirds of the economy and if they're not looking too well, (Fed officials) are not going to be rushing to taper."

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"It might start some people thinking 1.5 percent [Q3] GDP [gross domestic product], not 2 percent. Confidence came off due to the shutdown," Rupkey said. "The fourth quarter doesn't look as solid, whether or not it's an outlier."

The Fed last met in September and surprised markets when it did not announce plans to "taper" or reduce its $85-billion-a-month bond-buying program. Economists now believe there is little chance the Fed will reduce its quantitative easing program at this week's meeting; most think it will not move until March.

"I think it will be pretty much cut and dry, very minor statements being made," said Rupkey of the October meeting. But he also said the Fed might decide to cut back on its bond buying at the December meeting. "December will be much more interesting. We'll have two more employment reports. We'll have the bad one in November, and then one in December," he said.

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Rupkey said October's jobs report, due for release on Nov. 8, could be very poor due to the temporary impact of the government shutdown. Economists expect the November report to then be artificially inflated by the return of workers.

Other data expected Tuesday includes the producer price index for September, which was also delayed. It will be released at 8:30 a.m. The S&P/Case Shiller home price index will be reported at 9 a.m. and business inventories and consumer confidence will be released at 10 a.m.

"I think the market has to come to a conclusion on where the economy is right now. I don't think we've really had any good data that's telling us where we are… so you have a market that's waiting around, and the leadership is getting more defensive," said James Paulsen, chief investment strategist at Wells Capital Market.

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Materials and consumer discretionary were the worst performers Monday, while defensive consumer staples and telecommunications had the best gains. Monday finished down 1 point at 15,568, and the S&P 500 was up 2 points at 1762.

"Obviously the Fed's not going to do anything... They're waiting around for the same thing we're waiting for. That December meeting could be interesting. I'm not saying I put great odds on it, but if the data comes out in November and December and shows that we're okay, they could taper then," Paulsen said.

Paulsen said the market is taking the earnings season in stride. "If anything, it turned out a little bit better than expected," he said. "I'll be looking at the confidence number, the retail numbers, the claims numbers…you've to get to December before you get clean monthly reports."

Some economists expect the hit to growth from the shutdown to have been about 0.2 percent a week, or a total 0.5 percent from fourth quarter GDP.

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Companies due to report earnings before the opening bell on Tuesday include BP, Pfizer, Deutsche Bank, UBS, Aetna, Cummins, Archer-Daniels Midland, Johnson Controls, JetBlue, Air Products, Goodyear, U.S. Steel, Nokia, Thomson Reuters, Allergan, Valerio energy and Occidental Petroleum.

Those due to report after the close include Aflac, LinkedIn, Dreamworks Animation, Yelp, Western Union, United Health Services, Cabot, Caesars Entertainment, Baidu, Flextronics, Genworth Financial, Cirrus Logic and Shutterfly.

Apple reported better-than-expected fiscal-fourth-quarter earnings and revenues Monday, but its stock immediately sold off on the company's lower-than-expected gross margin forecast. But it recovered later during the company's conference call.

"I think the market was gasping for air today, and you could see some kind of pull back, but I don't' think it's going to be because of Apple," said Steve Massocca of Wedbush Securities.

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"I think the market is expensive and certain parts of the market are very, very expensive," he said. "That could continue for a while."

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.