July jobs report key to Fed action

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Now that the Fed has spoken, focus shifts to Friday's jobs report.

Thursday has several important economic reports, but traders are looking past ISM manufacturing data and weekly jobless claims, to the July nonfarm payrolls because it will be key in the Fed's decision making process.

The Fed has said it could begin to pare back its $85 billion monthly bond buying program before year end if the economy improves, and jobs data is a key metric it watches.

There are also Bank of England and European Central Bank meetings Thursday, ahead of the New York open. Auto makers report monthly sales Thursday, and there is construction spending data at 10 a.m. Manufacturing PMI is released at 8:58 a.m., ahead of the 10 a.m. ISM release.

"It's all about Friday's employment report," said CRT Capital senior Treasury strategist Ian Lyngen. Economists expect 184,000 nonfarm payrolls were created in July and an unemployment rate of 7.5 percent, according to Thomson Reuters.

(Read more: Steady Fed: Printing presses to keep on rolling)

John Canally, invsestment strategist and economist at LPL Financial said there is also Chinese PMI data overnight that markets will be watching. He said the confluence of Thursday's ISM data, Wednesday's GDP, Friday's jobs and the Fed meeting all in the same week is an unusual occurrence and happened only seven times in the 708 weeks, going back to January, 2000. "You usually get more volatility. This week has not been that volatile but we still get that China data and we have the jobs report," Canally said.

The Fed Wednesday met amid a swirl of market activity but by the end of the day, big intraday moves in bond yields and stocks were erased and both looked barely changed on the day.

"That continues a pattern of about 14 days in a row where we didn't' have a one percent move in the market" on a closing basis, said Art Hogan, chief market analyst at Lazard Capital Markets. "Around the jobs number we could get more volatility if we could get something much higher than consensus which has been inching higher…There have been some whispers around since Monday that it's going to be north of 200,000."

(Read more: Big jobs number coming? Data firm TrimTabs says just 23,000)

Traders were on high alert Wednesday for any change in the Fed's discussion of its asset purchase program, but it simply repeated that it would buy $40 billion in mortgage securities and $45 billion in Treasurys per month.

Bond market traders, however, viewed the Fed's statement as dovish because it downgraded its view on the economy to reflect "modest" growth, as opposed to the moderate growth in its last statement. It also added that currently low inflation could be a risk to the economy.

While not altering the language on asset purchases, it "reaffirmed its view" that a highly accommodative monetary policy would be appropriate well after it ends asset purchases and the economy strengthens.

(Read more: Art Cashin Video: Fed 'chickened out'

"The statement was meant to keep the waters still after the storm," said Tony Crescenzi, strategist and portfolio manager at Pimco. "There are various aspects to it that many are focused on but they really don't change the broader picture, which is number one, the Fed remains on the taper trail."

Stocks were higher in early trading Wednesday, with the Dow vaulting triple digits and setting a new intraday high, but they gave up much of their gains just ahead of the Fed's 2 p.m. statement. The Dow ended up finishing down 21 points at 15,499, and the S&P 500 ended off less than a point at 1685. The 10-year yield jumped early in the day on a better-than-expected private payrolls report from ADP, showing 200,000 jobs in July, and also a better than expected 1.7 percent GDP growth rate in the second quarter.

(Read more: Jumping jobs! Private sector makes big hiring move

The 10-year yield briefly touched 2.7 percent in morning trading, a move of 10 basis points, but it was at 2.66 percent just before the Fed meeting. After the Fed, it slipped back to 2.58 percent, its lowest levles of the day.

"The reference to modest growth rather than moderate is merely a statement of fact, and it was backward looking given it was referencing a six-month time frame," Crescenzi said. "The Fed kept its confidence about future growth. The Fed expects growth of 3 to 3.5 percent next year."

Crescenzi said by adding concerns about low inflation to its statement the Fed has now made a stronger trend in inflation a necessary element before it raises its policy rate. He expects the first hike in the Fed's target Fed funds rate to be in 2016, but market expectations have moved forward as the Fed discussed tapering.

(Read more: Obama's 'Grand Bargain' for job creation)

"If it depends on lower unemployment and also higher inflation, investors are less likely to pull forward expectations on the date of tightening," Crescenzi said. The Fed has targeted 2 percent inflation and 6.5 percent unemployment before it moves the Fed funds rate. At a 1.1 percent year over year gain in the core PCE, personal consumption expenditures, the Fed's preferred inflation metric is at the lowest level since the data was first compiled in the 1950s, he said.

The Fed also noted for the first time that while housing is strengthening, mortgage rates have risen somewhat. It reiterated that fiscal policy is restraining growth.

(Read more: Jobs data pitted against growth, but one trumps the other)

As for the jobs data, Crescenzi said the Fed looks more broadly than one to two months, and will rely on six months of jobs data. The moving average for the past six months has been just above 200,000.

"175,000 (jobs) is probably good enough. For the next two months, 175,000 is plenty to keep the Fed on the taper trail," he said.

Besides the data, there are dozens of companies reporting before the opening bell Thursday, including Exxon Mobil, Procter and Gamble, ConocoPhillips, Arcelor Mittal, Barrick Gold, Avon Products, Kellogg, Clorox, Time Warner Cable, DirecTV, Enbridge, Mylan, Beazer Homes, Chesapeake Energy, Sanofi, Marathon Petroleum, Royal Dutch Shell and Siemens.

After the close, LinkedIn, Teva, Kraft Foods, AIG, ActivisionBlizzard, Onyx Pharma, Con Ed, Tesoro, Mohawk, and Southwestern Energy report.