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Fallout from the Fed and a hefty calendar of data could drive Thursday's markets

  • Thursday's markets could be driven by a big batch of economic reports, including Philadelphia Fed and Empire State manufacturing data and industrial production.
  • Markets are scrutinizing data after the Fed kept its rate forecast unchanged even with a series of squishy inflation reports.
  • Thursday's markets will also be trading the fallout from the Fed's rate hike and its forecast.

Markets could give extra weight to Thursday's economic data, after the Fed said it would proceed with interest rate hikes despite softish inflation data.

Stocks floundered after the Fed raised interest rates by a quarter point as expected Wednesday, though the Dow edged higher to a record close. But markets viewed the Fed as hawkish because of the fact it seemed to look past weakish inflation, raised its economic outlook, and laid out a plan to begin reducing its $4.5 trillion balance sheet.

"[Yellen] was [overly optimistic] based on the data today. I don't see them moving again this year, unless things improve dramatically," said Art Cashin, director of floor operations at UBS.

Thursday's data includes weekly jobless claims and import prices at 8:30 a.m. ET. Both the Philadelphia Fed survey and Empire State manufacturing survey are also released at 8:30 a.m. There is industrial production at 9:15 a.m. and the National Association of Home Builders survey at 10 a.m. The Treasury releases data on international capital flows at 4 p.m.

Cashin said the markets will also be watching oil. West Texas Intermediate slumped 4 percent on supply concerns, closing at $44.73, below the key $45 per barrel level.

While the Fed was widely expected to discuss its balance-sheet reduction, many market pros did not expect to see as much detail as was provided in the Fed's statement, and some took that as hawkish. The Fed also maintained its interest rate forecast, predicting another hike for this year.

The Fed has said it would begin unwinding the Treasurys and mortgage securities it holds as they mature, at an initial cap of $10 billion a month for both. It will begin the process this year, depending on the economy.

A number of market pros also said the Fed sounded surprisingly optimistic about the economy even with a slump in core consumer inflation to a 1.7 percent year-over-year pace from 1.9 percent in April. Prior to April, core CPI had been above 2 percent since late 2015. Retail sales data was also soft, falling 0.1 percent when a gain was expected.

"They seem to pretty much continue their course. They've been saying another rate hike after June, and the statement seems to underline that," said Ed Keon, portfolio manager and managing director at QMA. "If they're right and the economy is strengthening a little bit, then another rate hike is the thing to do."

But Keon also said there's a conundrum in the fact that unemployment is so low but so is inflation, which normally would begin to be affected by wage pressures in that type of labor environment.

"If you start to see signs of weaker data spreading that would be bad for stocks, good for price increases in the bond market and bad for yields on the other hand. If the Fed is right, and the economy is going to grow, then we might see this bull market in stocks last a bit longer. I'm rooting for them if that's the case," Keon said.

Watch: How to make money on Thursday