Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, said some market players may be expecting too much.
"Everyone's hopeful that the warmer weather is going to mean that we're going to see an improvement in hiring and the profile in hiring," he said. "The thing that worries me is we've been led down the primrose path many times, and it's ended badly. The best I can say is I'm keeping my fingers crossed."
Rupkey said the jobless claims data have been encouraging despite a slight increase in the past week to 326,000. "The labor market is still healing. If it's a bad outcome, it's probably going to be bedlam if that number is not so good. I hope 200,000 is enough," he said. "I'm afraid we've been stoking the fires a little too much."
Treasurys were trading higher Thursday, with yields moving lower after jobless claims were slightly higher than expected, and data that showed the trade deficit unexpectedly widening. The trade number was a particular concern since it will impact GDP. JPMorgan economists said the number puts their forecast of 1.5 percent first-quarter growth at risk.
Rupkey said the bond market is expecting rates will rise after the jobs report, when it is released at 8:30 a.m. ET on Friday. "We've been locked in this range of 10 years for two months, so when we break out of that range it's a big deal," he said, noting the range of 2.6 to 2.8 percent. "We're going into that number at 2.8, expecting to push higher."
He said in a note that the whisper numbers were 220,000 to 240,000, but some traders say they are hearing numbers higher than 250,000. "I think the chance of a surge in yields is higher than a chance for a collapse in yields. ... The market really wants to sell off here in terms of price. The two-year and five-year yields are telling you people are preparing for higher yields," Rupkey said.
The employment report is one of many data points watched by the Fed, but it is viewed as a critical component in its policy decisions. Therefore, the jobs number will also help shape market expectations for the Fed's wind down of its quantitative easing program and ultimate move to raise rates, now expected in 2015.
Ian Lyngen, senior Treasury strategist at CRT Capital, said the market was not trading Thursday as if it expected a higher number, and labor anecdotes were more negative than positive for March. "Those are skewed negative, and the market's rallying. None of these really suggest there's a screaming upward bias for the number but there seems to be these spring animal spirits," Lyngen said.