Wednesday is one of the last big days for Fed gazing before its September rates meeting.
The minutes of the Fed's July meeting are expected to be released at 2 p.m., and traders are hoping the Fed minutes will give new insight into Fed thinking on rate hikes that did not come out in the post-meeting statement. Before that, the consumer price index will be released at 8:30 a.m. and will be important if it brings any surprises, especially a lower-than-expected pace of inflation.
"The reality is you're not going to get a lot of new incremental data from the minutes," said Bank of America Merrill Lynch equity strategist Daniel Suzuki. He said missing would be Fed reaction to the currency devaluation by China and the selloff in commodities that occurred after the July meeting.
John Briggs, RBS head of strategy said there are three things he's watching in those minutes, and the bond market could potentially move on any of them. "I'll be looking to see if they're still 'confident' that if the data continues on its way, that inflation will move up to their target. They've said as long as there's ongoing improvement in the economy, they expect to get inflation to go back to target," he said.
Secondly, if there's any new emphasis on international concerns, he said that would be viewed as hawkish. "This meeting happened between Greece and China. International developments should be fine, but if they tell you they are worried that tells you they put it in afterwards, so that's dovish," he said.
Finally, Briggs said some market players now expect the Fed to use the minutes to send a signal that a September rate hike is in the offing. While he doubts the Fed would do that, he said some investor are expecting something and such a move would be very hawkish.
"If they don't have a more forceful tone that they're ready to raise rates in September, you could see bonds rally on that," he said.
Briggs said the odds in the futures market for a Fed rate hike could shift either way, based on the minutes. As of Tuesday, RBS calculated that futures were showing about a 45 percent chance of a September hike, while the odds of a December hike were near 100 percent. Since Fed timing is one of the most hotly debated market topics this summer, the market odds have shifted in each direction recently, depending on data, China concerns and Fed speakers. Briggs also said if the CPI is weaker than the 0.2 percent gain expected, that would be dovish.
There are just a few more big pieces of data the market is watching before the Fed meets on Sept. 16 and 17. The Fed has indicated it is data dependent so the data that most applies to its dual mandates of employment and inflation count the most. So first and foremost, markets are awaiting the employment report on Sept. 4, then PPI on Sept. 11 and CPI on Sept. 16.
Retail sales are also somewhat important on Sept. 15, and ISM manufacturing data Sept. 1 could be more important after the Empire State survey fell to the lowest level in six years.
The market will also be on the lookout for any Fed speakers, particularly after recent comments from Atlanta Fed President Dennis Lockhart signaled a willingness for the Fed to move. And of course, any other unexpected event will be interpreted for how it might impact the Fed's move to raise interest rates for the first time since taking the fed funds rate to zero in 2008.
According to Bespoke, the stock market has had a mostly quiet reaction to the Fed minutes after the 13 releases since the beginning of 2014. Bespoke says that in that period, the S&P 500 has seen a positive average gain of 0.13 percent between the 2 p.m. release and the close, and it has been positive 75 percent of the time.
Overall, the S&P 500 has been up an average of 0.24 percent for the entire day of the Fed minutes release, with gains 54 percent of the time.
The last release of the minutes, however, was negative, and the S&P 500 fell 1.7 percent on the day.
As for stocks, Suzuki sees a pull back as possible, and the market is intently watching data at this point.
"The near-term visibility is low, so you have to monitor the data a lot more," said Suzuki. He said worries about China's 3 percent currency devaluation were overdone. "The big worry for investors was the pace of devaluation. As a firm, we still believe it could be 10 percent over the course of the year."
Stocks Tuesday drifted lower Tuesday. The Dow fell 33 to 17,511, and the S&P 500 slipped 5 to 2,096. Treasury yields were higher in late trading, with the 2-year at 0.718 percent and the 10-year yield at 2.19 percent.
Besides data, there are some key earnings Wednesday including Target, Lowe's, Hormel Foods and Staples, before the bell. After the bell, L Brands, net App, Momo, Popeye's Louisiana Kitchen and Synopsis.
Oil will also be in the spotlight with government inventory data expected at 10:30 a.m. Wednesday. Oil rose Tuesday ahead of government report. West Texas Intermediate futures rose 75 cents to $42.62 per barrel. Crude stocks are expected to show a drop of 1.2 million barrels for the week ended Aug. 13, Platts said.
According to Platts, the drop in inventories includes 250,000 barrels from the outage at BP's Whiting refinery.
"Over the past several weeks, we've seen oil inventories decline and we've seen U.S. production decline. In an oversold environment like this, the market is looking for any excuse to rebound," said John Kilduff, partner with Again Capital.