Minutes from the Federal Reserve's last meeting could keep markets on the boil, if there's much discord among members or it takes a hawkish tone.
Traders are looking for comments about inflation in the minutes from the June 18 meeting, after Fed Chair Janet Yellen told a post-meeting press briefing that the pickup in CPI was just "noise."
"I would be surprised if the consensus agreement was it was just noise. There's going to be some people who had something to say about it," said Paul Hickey, co-founder of Bespoke.
Higher inflation could push the Fed to hike rates sooner; the timing of a rate hike is a market obsession. For inflation, the Fed prefers to monitor the PCE price index, which is running behind CPI.
"There is starting to be a growing cohort among investors that the Fed is behind the curve. Does it make a big difference to us whether the Fed starts [to raise rates] at the end of the fourth quarter or the second quarter next year? I would argue it does not," said Art Hogan, chief market strategist at Wunderlich Securities. "I think the question is, is it the beginning of the second quarter or the beginning of the third quarter. To be somewhere in that range, is pretty consensus."
Bespoke notes that, since the beginning of 2013, the S&P 500 tended to have a positive bias before the release of Fed minutes and sold off afterwards.
In the past 12 releases, the S&P declined after the 2 p.m. ET release eight times for an average decline of 0.2 percent, and it was positive 75 percent of the time on the day following the minutes.
However, after the past two minutes releases, stocks closed higher. Hickey said that may reflect the fact that investors were more comfortable and able to take the Fed's tapering of its bond buying program in stride.
"There's more of an opportunity for a negative surprise than a positive surprise. I don't think they'll sound more dovish than they did," he said. During the June meeting, some traders were anticipating, the Fed could give a nod to inflation but it did not change its statement.
The bond market could already be on edge Wednesday ahead of the Fed news, as it awaits the 1 p.m. $21 billion 10-year note auction.
"We should see rates grind higher into both these events, and if they're nonevents like I think they will be, we rally back down," said George Goncalves, head of rate strategy at Nomura. The 10-year Treasury was yielding 2.56, off five basis points from Monday.
"Long-term rates are supported by the feeling if the Fed hikes, they won't hike that much," said Goncalves. Global competition is also a factor supporting the U.S. long end, with U.S. Treasuries looking more attractive than those sovereigns in Europe or Japan.
But he does not expect the Fed to put a chill into markets by revealing anything new on its exit strategy until at least September, when it closes in on the end of tapering its bond buying program.
"Why upset the apple cart? The Fed does not want to be the source of volatility. When they come to hiking, they're going to do it in a methodical way, and the only thing that could force their hand is the inflation thing," he said.
"The minutes are always going to include a spectrum of thoughts across the committee. They're going to talk about inflation. It could come down to reading between the lines. I think we learned whatever we need to learn from the June meeting on that day," he said.
Goncalves said the bond market rally can't be attributed to any one thing. "Could it be a number of things happening at once? It could be. Stocks were down today. It could just be the standard relationship. That's as good a reason as anything else," he said.
Stocks were whipped Tuesday, with the high-beta and momentum names in the and leading the selloff. The was down 117 at 16,906, and the S&P was off 13 at 1963. The VIX jumped more than 5 percent to 11.98, a near 15 percent gain in two sessions but is still trading at a very low level.
"Starting next week when we get into the heart of things, earnings will be the driver," Hogan said. "You had a strange confluence of events that took us to new highs last week – not many players on field. You had the new quarter, new half."
The first major earnings out of the gate Tuesday afternoon was a positive, with Alcoa beating estimates on the top and bottom line. Its stock gained in afterhours trade.
Traders said stocks Tuesday reacted to concerns that the Israeli air assault in the Gaza could escalate. Comments from Wal-Mart that jobs gains weren't fueling consumer spending also was a negative for sentiment.
James Paulsen, chief investment strategist at Wells Capital, said rising wages to fuel consumption was one thing missing from the jobs report, and it would have made a difference in the views toward inflation. Even so, he said the mind set in the market is changing.
"I think the stock market is starting to say there might be some rate risk," he said.
Paulsen said more than in the minutes, it will be Fed speakers' comments that clue the market in on the Fed's move toward normalcy.
What to Watch
Besides the Fed minutes and Treasury auction, there are mortgage applications at 7 a.m. and EIA oil and gas inventory data at 10:30 a.m. ET.
Media executives convene at the annual Allen and Co conference in Sun Valley.
—By CNBC's Patti Domm