On data-heavy day, retail sales will be key

August retail sales should come in better than July's and show that consumers spent on cars, while they saved money on gasoline.

Retail sales, released at 8:30 a.m. ET, is the most important data point since last Friday's disappointing jobs report showed just 142,000 jobs were created in August, far short of expectations and the first sub-200,000 payrolls figure in seven months. Other data expected Friday include import prices at 8:30 a.m., consumer sentiment at 9:55 a.m., and business inventories at 10 a.m.

But traders will likely give the most consideration to the retail sales report, viewing it as another piece of evidence, either in support of a growing economy, or in line with the poor jobs report, which most economists are calling an anomaly. "It'll be indicative of the state of consumer spending. We know comparatively we had a weak reading in the month before…this month will show if it's an aberration or some evidence that it's a pattern," said Janney Montgomery market strategist Mark Luschini.

Customers shop at a newly opened J.C. Penney store at the Gateway Center Mall in Brooklyn.
Getty Images
Customers shop at a newly opened J.C. Penney store at the Gateway Center Mall in Brooklyn.

"It should show improvement from last month, and it's probably a number more reflecting of economic growth that's more like 2.5 to 3 percent…that could be a positive for the market," Luschini said.

Stocks were mostly higher but mixed Thursday, with the Dow 19 points lower at 17,049; the S&P 500 nearly 2 points higher at 1997, and the Nasdaq up 5 at 4591.

Read MoreWhy the key to the economy may be in your gas tank

Treasury yields fell during the day, as prices gained, but that reversed ahead of Friday's data and the 10-year yield went to 2.55 percent in late trading. Traders said the discussion about whether the Fed would change the tone of the language in its statement next week was still an undercurrent. Speculation has been rife that the Fed will drop the language about keeping rates low for a "considerable" time, which in essence could change Wall Street's expectations that the first rate hike will come mid-year 2015.

CRT Capital surveyed market participants and found that 68 percent put the odds of language change at less than 50 percent, while 21 percent put odds of a change at over 50 percent. The rest saw a 50/50 chance. "That suggests a shift of the "considerable" period language of any sort would come as surprise to the majority of people," the CRT strategists wrote, but they noted that the majority of people also thought the Fed would take care to clarify it in a way to soften the impact of that change.

Luschini said the retail sales data will be watched through the prism of how the Fed might read it, as the most significant data on consumer consumption ahead of its meeting. He said the market is also looking ahead to the Fed meeting to see if it tweaks its statement. "The market is a little testy of what that might be," said Luschini. He pointed to the reaction to recent comments from Fed officials and a San Francisco Fed staff paper earlier this week that said investors were behind the Fed in expectations for a rate hike.

Read MoreKeep betting on this part of the market: Pro

If the retail sales number is strong, the market may read it as a sign the data is getting stronger and will ultimately prod the Fed. "There's still an element of bad news is good and good news is bad," he said.

Economists expect retail sales gained 0.6 percent in August, and were up 0.5 percent for the retail control which excludes building materials, autos and gasoline. For July, sales were unchanged and the control group was up 0.1 percent.

"Retail sales were lackluster in the month of July. We've seen same store sales a little better," said Mark Zandi of Moody's Analytics. "Auto sales were off the charts. I'm expecting to see a pickup in core retail sales."

Zandi expects sales to be up 0.9 percent, and up 0.5 percent when excluding autos and gasoline, and 0.5 percent for the control group.

Deutsche Bank chief U.S. economist said auto sales should be up 2 percent, and if excluded from the headline number, retail sales would be up 0.3 percent. If gasoline was excluded as well, retail sales would be up 0.5 percent since gas prices fell 3 percent. He said there was an overall 1 percent decline in gasoline sales in August.

Read MoreWhy stocks could get slammed

LaVorgna expects retail control to rise 0.4 percent. That number is most important to markets because it represents the core of the report.

He is also watching July business inventories, expected to rise 0.5 percent, but he said there was risk in that they are lower due to the weaker than expected reading in July wholesale inventories.

Lipper released fund flow data after the close Thursday, which showed a flood of money moving to money market mutual funds and outflows from domestic equity funds while investors bought stocks overseas.

It said there was a net inflow of $7.4 billion, and money market funds took in $5.3 billion. Investors also bought the $223 million in MSCI Brazil Capped ETF (EWZ) and $263 million of iShares MSCI EMU ETF (EZU). Meanwhile, nondomestic equity funds had positive flows of $700 million while domestic equity funds had outflows of $600 million.

—By CNBC's Patti Domm