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Last look at consumer before Fed meets

After consumer sentiment fell off a cliff, traders are watching to see whether consumers reined in spending in August.

Economists say retail sales for August are probably not going to reflect the same dip in sentiment yet, but markets are watching the Tuesday morning report closely nonetheless.

The widely watched Thomson/Reuters University of Michigan consumer sentiment gauge was a major disappointment Friday, when it fell to 85.7 in early September, from 91.9 in August, the lowest level in a year.

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Retail sales are expected to have risen by 0.3 percent, slower than the 0.6 percent gain in July. Retail control, excluding gasoline, building materials and autos, is expected to be up 0.4 percent, according to Thomson Reuters. Control was up 0.3 percent in July. Excluding autos, sales were expected to gain 0.2 percent.

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

"There was some talk about weakness because of the late Labor Day," said Mesirow Financial's chief economist, Diane Swonk. "That pushed back a lot of spending even though school started earlier…. People don't buy clothes until after Labor Day. It could be a timing issue."

Tom Simons, money market economist at Jefferies, said the number could also be distorted by uneven gas prices across the country. In the Midwest, for instance, gasoline prices shot up above $3 a gallon in several regions because of a refining outage. Simons expects retail sales to rise an above-consensus 0.5 percent.

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"Retail sales are quite important. When you think about most of the overall growth in the economy, consumption is a big part of it…. Retail sales are a little dangerous to put a lot of faith in because of the volatility in prices, particularly gas prices," said Simons.

Traders are also watching retail sales with an eye on the potential reaction of the Fed, which begins its two-day meeting Wednesday. Wall Street is split on whether the Fed will raise rates, but the market has priced out a September rate hike, putting higher odds on December or next year.

Economists say the retail sales number is unlikely to have impact on the Fed's decision making process, but the consumption data and Wednesday's Consumer Price Index are both being watched carefully. The Fed has been concerned that inflation is not meeting its target but officials have said they could raise rates if they believe inflation is on track to rise.

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"If there was a number the Fed was most anticipating, it was the consumer sentiment number. The other thing is confidence is supposed to be more forward looking," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. The importance of the consumer sentiment reading was highlighted recently by New York Fed President William Dudley, who said it would be the first look at whether market turbulence is affecting the real economy. Its decline led to more speculation the Fed would hold off raising rates in September.

"If the (retail) number is weaker than expected, the market will over react," said LaVorgna. "I think the market is not expecting he Fed to do anything. I don't think it's going to change much."

Retail sales are released at 8:30 a.m. ET Tuesday. There is also the Empire State survey at 8:30 a.m. ET, industrial production at 9:15 a.m. and business inventories at 10 a.m.

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