Retail sales takes pulse of consumer

Jaime Henry-White | AP

Tuesday's retail sales should be an important check up on consumers and could show they are picking up their pace of spending.

Retail sales are expected to be up 0.3 percent, and 0.4 percent when autos are not included, compared to 0.4 percent in June, or 0.1 percent excluding autos. The number is reported at 8:30 a.m. ET. as are import prices. The NFIB small business survey is released at 7:30 a.m. and business inventories are reported at 10 a.m.

"The core measures were quite weak in June. I found that a little bit curious at the time because some of the anecdotes you heard out of retailers were much better," said Barry Knapp, head of equity portfolio strategy at Barclays. "I wouldn't be surprised to see that get revised up. June was kind of a funny month because we had weather issues around the country. Generally speaking , my impression is consumer spending has held up really well in spite of all the tax cuts."

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Citigroup economists expect to see core retail sales, up 0.4 percent, accelerating at the fastest pace since the end of last year. "Core retail sales appear to have accelerated in the month, as suggested by the recently reported gains in same-store-sales," Citigroup chief economist Robert DiClemente wrote in a note. "Restaurant receipts fell in May and June, but at the same time employment in that sector expanded and sector specific surveys picked up. We suspect there will be a correction in restaurant sales, but whether it comes as a rise in July, or upward revisions to back months is unclear."

(Read more: Amid slow recovery, retailers boost sales with promotions)

DiClemente expects spending on building materials rose 0.9 percent and general merchandise was up 0.5 percent. He expected autos to decline 0.6 percent, after June's 1.8 percent gain.

Stocks were flattish and mixed Monday, with the Dow down 5 at 15,419, and the S&P 500 off 1 at 1689. The Nasdaq rose 9 to 3669.

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"I think that the bias is lower between now and the FOMC meeting," said Knapp. The meeting, Sept. 17 and 18, is when the Fed is expected to make a decision on paring back its $85 billion a month in asset purchases. If data continues to improve, especially jobs, but also things like retail sales, more traders will start to look at a September start date for a Fed pullback as inevitable.

Knapp said stocks have yet to react to the pending reduction in stimulus, and the higher rates that would come with it. "I think we have that in front of us," he said. "A reaction to the Fed and just this whole dynamic around what does cutting those purchases mean."

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Knapp said he expects to see a rotation away from cyclicals as investors react to the idea of the Fed slowing down its easing. "I think markets were a little out of step," he said. "The financial sector to me has been offering a little bit of the clue around this whole rotation. It was one of the two worst sectors last week. It was on the soft side. Some of that could have been regulatory-related. To me that sector is what you really would expect to see going down in anticipation of the Fed reaching this inflection point. I don't think the market is prepared for it."

Besides economic reports, traders will be watching for comments related to Fed 'tapering' from Atlanta Fed President Dennis Lockhart, who speaks at 12:45 p.m. on the economic outlook.

(Read more: GDP growth a question mark as wholesale inventories miss)

Earnings are expected from Flowers Foods, and Elbit Systems ahead of the opening bell. Cree, SeaWorld Entertainment, Jack Henry and Associates, JDS Uniphase, Myriad Genetics and Taylor Morrison Home report after the closing bell.

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.