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A sorting out: What does it all mean?

Stocks futures rose Wednesday as the dollar slumped, but the market could continue to trade sideways, as investors sort out whether improving data means the economy is getting strong enough for the Fed to hike interest rates.

The dollar fell overnight after Bank of Japan Governor Haruhiko Kuroda suggested the Japanese currency shouldn't fall further since it was already "very weak".

Stock futures gained, even as rising rates could keep a lid on any rally. The 10-year Treasury note was yielding 2.48 percent, ahead of the $21 billion 1 p.m. ET auction.

Julian Emanuel, equities and derivatives strategist at UBS, said, "Stocks are) trying to come to grips with the fact that rising yields on both the long end and the short end tend to mean that the economy is going to be better but the thing is, you've only seen the first very small shards of that evidence, and you're really waiting for more that gives you a strong sense of confidence that that's going to be the case, and in the meantime, you have Greece in the background."


"WWith the Fed's next meeting just a week away, the view on Wall Street has been that the central bank will take no action on rates but steer the markets towards a rate hike later in the year.

Improving data, including Friday's strong May jobs report, better wholesale trade data and JOLTs, a report that showed the most job openings in the survey's 15-year history, are all driving traders to bet more on a September launch date for the first Fed rate hike in nine years.

"When you look over the six years of this bull market, there's been 12 instances of 5 percent or more corrections since the low of '09. If you think about it, the last one was September and October of last year. So, by a lot of rights, you're due for one now. For us, the fact the market is just trading sideways is a continuation … we think it resolves itself higher but there's too much uncertainty here now to move higher yet," said Emanuel. "It may take multiple weeks of continued churn."

Equities markets globally have been reacting this week to the idea of a possible Fed rate hike this year, and while the markets are betting more heavily on September, some economists believe December or even next year are the first possible times for a rate hike. Bank of America MerrillLynch strategists, in a note, warned Tuesday that investors need to watch the "dots" or the chart with Fed member expectations on interest rates, after the Fed meets next week.

The B of A strategists said the rates market continues to underprice the potential for a September rate hike, with just a likelihood of 10 basis points priced in when looking at what is implied by overnight index swaps curve. The strategists expect the Fed to move slowly to raise rates, and they do not see rates rising sharply because of deflationary pressures from Europe and elsewhere.

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They note that the market is likely reflecting continued uncertainty about the prospects for growth after the weak start to the year, but they also point out tracking GDP for the second quarter is improving and is now at 2.9 percent, after the first quarter's 0.7 percent contraction.

Stocks fluctuated Tuesday as higher bond yields influenced the trading range. There is no significant pre-market data Wednesday, but mortgage applications, released at 7 a.m. ET, were up 8.4 percent last week, while interest rates were at the highest level since November. There is also the Census Bureau's Quarterly Services Survey for the first quarter at 10 a.m. ET.

J.P. Morgan economists point out that the QSS report last year led to a big downward revision in 2014 first quarter GDP to minus 2.9 percent. They note the QSS data will be used as source data for services consumption and investment in intellectual property products in the next report on first-quarter GDP. J.P.Morgan economists do not see a similar impact on first quarter data, as there was last year, even though another cold winter once more bit into growth.

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But the buzz in the market could once more be about rising interest rates. The Dow fell 2 Tuesday to 17,764, and the S&P 500 was higher by less than a point at 2,080, while Nasdaq fell 7 to 5,013. Meanwhile, interest rates rose, with the 10-year reaching a new eight-month high of 2.44 percent.

While there is a dearth of data, there is a $21 billion, 10-year note auction at 1 p.m. and it is much anticipated, after the recent volatility in bonds. U.S. Treasurys have been taking their lead from German bunds, which have been selling off. The German 10-year yield reached 1 percent Wednesday on rising inflation expectations.

The 10-year auction should be successful but at higher rates if the three-year auction is a guide. The three-year was priced to yield 1.125 percent, the highest since April 2011. Longer end rates came down after the auction.

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"I think the (stock) market is thinking more around the idea that rates are going to go up," said James Paulsen, chief investment strategist at Wells Capital Management. "The big question out there is whether rates go up because the economy is getting better or because cost push inflation pressures are starting to emerge. This is really the first time we could start tightening that margins could start eroding because of cost pressures. The other thing you notice is that stock and bond correlations are starting to change. It used to be when rates go up, stocks go up."

Along with Friday's report of 280,000 nonfarm payrolls was a better-than-expected 0.3 percent rise in average hourly wages. The Fed has been waiting to see if inflation would pick up, and traders pointed to that hourly wage improvement as a potential early sign of wage inflation.

Paulsen said the Citigroup economic surprise index, widely watched by traders, continues to show signs of bottoming. The index tracks whether data is beating or missing Wall Street expectations, and it has begun to beat.

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"If the (10-year yield) breaks the 2.50 or the 2.62 area, you're going to see a lot more people nervous about it," said Paulsen. "It may be that Thursday could be big in that regard because I think people have been waiting to see if the consumer comes in." The May retail sales report is expected to show a gain of more than 1 percent Thursday.

"If you get a solid upward bounce in the consumer, we've already seen the manufacturing sector bounce," he said. "The core CPI bounced. JOLTs today was outstanding. If we get that consumer showing a sign of starting to spend those energy savings, I think you're going to get people looking to see if the market can handle it."

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What to Watch

7 a.m.: Weekly mortgage applications

10 a.m.: QSS, the Census Bureau's Quarterly Services Survey

10:30 a.m.: The Energy Information Administration releases oil and gasoline inventory data.

Noon: The USDA's World Agricultural Supply and Demand Estimate report is released at 12 p.m. ET. The monthly report is expected to show forecasts for poultry, eggs and milk as well as grains, corn, wheat and soy beans.

2 p.m.: Federal budget

Box, Krispy Kreme and Men's Wearhouse report earnings.