Several Fed speakers hit the circuit, including San Francisco Federal Reserve President John Williams in his first policy speech since becoming president of the San Francisco Fed. He speaks at 3:30 p.m. ET. Also speaking are Dallas Fed President Richard Fisher, at 4 p.m. and Atlanta Fed President Dennis Lockhart in Atlanta, at 7 p.m.
The Dow was flat Tuesday at 12,807, while the S&P 500 lost four points to 1356, and the Nasdaq lost 22 to 2814. The S&P energy sector was the biggest decliner, off 2.4 percent, followed by materials, down nearly a percent. The gainers were all defensive sectors, with telecom up 1.5 percent and utilities up 0.7 percent. The 10-year yield fell to 3.257 percent as bonds rallied.
"I'm not entirely surprised we have had some risk reduction, but I would say if the labor data is strong it puts to bed some of the comments that the GDP data is a sign of softening and the whole world is weakening," said Barry Knapp, equities portfolio strategist at Barclays Capital.
April non farm payrolls are reported Friday, but investors will also be watching weekly jobless claims data on Thursday, as well as the ADP report Wednesday.
CSFB economist Jonathan Basile said he expects the jobs data to show a decline. He estimates 150,000 non farm payrolls were added in April. "We think we're going to see a moderation. Jobs moderating, ISM moderating...We think tomorrow's non manufacturing ISM is going to moderate too," he said.
"The indicators of jobs that we track were not as decidedly positive as they've been in recent months," said Basile. "We're viewing it more as a thing that kind of delays certain things in the recovery. It won't take the recovery down."
Nomura Americas Treasury strategist George Goncalves said the markets and the data may be sending a message.
"The question is, is the bond market right or is the stock market right because they are diverging again, and they haven't diverged in awhile. The last time they diverged was November before quantitative easing, when rates were lower and stocks were heading higher," he said.
He said some of the action could be that investors are moving ahead of the end of quantitative easing in June. The Fed last week signaled it would end the program to purchase $600 billion in Treasurys, as expected. CNBC's Steve Liesman reported from sources Tuesday that the Fed had detailed discussions about its exit strategy at its meeting last week, and that the Fed would most likely stop buying assets before it takes other steps. In addition to the QE program, it is buying Treasurys as its mortgage holdings expire.
"The bond market is telling you the data is getting softer. The bond market is telling you it's not getting worried about inflation," Goncalves said.
The strategist also believes the jobs report could be a deciding factor for markets this week, and a very strong number could turn the tide. "I think it doesn't have to get to be gloom and doom, but I do believe people got a little excited, and they ran up the risk markets, and now you're having a little bit of a pull back. It's just like they're taking away a little of the liquidity punch bowl. The bond market's not saying there's an imminent demise of anything," he said.
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