Bond prices took a swift, violent turn higher after July's job gains of 162,000 fell short of expectations, but the numbers are not seen as so weak that it will change the Fed's plans to pare back its bond buying.
In an inverse move, Treasury yields fell sharply, the dollar sagged and stocks had a wishy-washy reaction before selling off. Economists had been expecting 184,000 jobs and an unemployment rate of 7.5 percent. The unemployment rate fell to 7.4 percent, and the government revised May and June payrolls down by 26,000.
"Last month's number was a little better. This was a little worse. The reality is in between. The world has not changed," said Mark Zandi, chief economist at Moody's Analytics. He said the Fed will proceed to reduce its monthly $85 billion in bond purchases in September, as expected. "I think it's on auto pilot now unless we get really surprised and we get derailed. (Employment) has just not achieved liftoff."
The onus is now on the August jobs report, the last one before the Fed's September meeting. Employment is a critical metric for the Fed in deciding whether to cut back on its bond buying program. Chairman Ben Bernanke has set up the expectation for the Fed to begin reducing its purchases before the end of the year.
"It's more likely September, but December is a possibility if the economy is on the weak side between now and the meeting," said Dick Hoey, BBNY Mellon chief economist. Hoey said the ISM manufacturing number, which was a surprisingly strong 55.4 when reported Thursday, signals more about the economy and was a more important positive surprise than the tepid job's report is a negative surprise.
(Read more: Jumping jobs! Private sector jobs surge)
St. Louis Fed President James Bullard, in a speech Friday afternoon, said the Fed needs to see more data for the second half before deciding on tapering bond purchases.
Bullard said his own predictions for economic growth have been too optimistic over the last several years, and he said he wants to see real evidence that the economy is recovering. The Fed has made it clear it will watch the data before acting.
"This number doesn't change anybody's mind. The data on the week has been positive. It doesn't take tapering off the table for the Fed," said John Briggs, senior Treasury strategist at RBS.
Before the 8:30 a.m. EDT report, bond traders speculated that the number would be way better than expected, and the 10-year yield rose from Thursday's 2.71 percent to 2.74. The yield then snapped back on a buying wave after the report, falling all the way back to 2.60 percent. In afternoon trading, the yield was 2.62 percent.
"The initial reaction was a lot. We (Treasurys) were also selling off into it. Immediately after the number, liquidity was a little spotty so that didn't help," Briggs said. "This is a fine number for equities. Payrolls was a little disappointing, but the week's numbers were great, and this doesn't say they're going to accelerate tapering, which is what people had been talking about." The Institute for Supply Management's index signals expansion at levels above 50. It was expected to be 52 by economists and at 55.4 was the best level since June 2011.
Just before the employment report's release, as the yields were rising, the CME Group triggered a five-second pause in futures contracts tied to the yields of 10-year and 30-year Treasurys.
Dow Jones reported that one minute before the jobs report came out an order came in to buy 2,000 10-year contracts, and after the order was filled another bid came in. The CME paused the market three seconds ahead of 8:30 a.m., Dow Jones reported.
Traders said the move frustrated the market. "It probably affected prices in and around the immediate time frame, but it would have been adjusted out," Briggs said.
(Read more: Jobless claims touch 5-1/2 year low)
David Ader, chief Treasury strategist at CRT Capital, said some in the bond market had become overly aggressive in their view of how quickly the Fed might taper its purchases. He said the market had sold off this week on a better-than-expected ADP payroll number of 200,000 and the ISM report, which had a strong jobs component. "This is a very tame report. It doesn't change the tapering. It does not change perhaps the timing of rate hikes. But the market has wanted to be negative, grasping at those items and it just got squashed. So we're seeing this brisk recovery from the sell off," he said.
Hoey said the bond market reacted as it should after the number, and the stock market's muted reaction shows it is responding to an improving economy. "If you look at the stock market, it's not saying bad news is bad news,'" he said.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.