ADP's private sector payrolls report will be watched Wednesday as the warm-up act for Friday's important government jobs report.
ADP kicks off what is a heavy calendar of data, which could add to volatility Wednesday. There are 173,000 private sector jobs expected, up from ADP's report of 130,000 for October.
Stocks sold off Tuesday, with the Dow and S&P 500 lower for a third session, amid speculation that stronger data will encourage the Fed to pare back its bond-buying program sooner than expected. The Dow was off 94, at 15,914, and the S&P 500 was down 5, at 1,795. The 10-year Treasury was at 2.78 percent in afternoon trading, off its earlier highs.
The ADP report, at 8:15 a.m. ET, will be followed by international trade data at 8:30 a.m. New home sales and ISM nonmanufacturing data are at 10 a.m. The Fed's Beige book on the economy is released at 2 p.m.
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The ADP number is not viewed as an accurate reflection of the government's monthly report but as a guide.
"It's had an average miss of 41,000," said John Briggs, head of cross-asset strategy at RBS. But, he added, economists' consensus estimate has missed the monthly nonfarm payroll number by slightly more.
While always important, the government jobs report is even more sensitive for markets this month as it is the last big key piece of data the Fed will have before it meets Dec. 17 and 18. While most Fed watchers expect no action to taper bond purchases at that meeting, the odds increase if the nonfarm payrolls are stronger than expected.
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According to Reuters, the November jobs report is expected to show a rise of 180,000 nonfarm payrolls and a slightly lower unemployment rate of 7.2 percent. October's 204,000 jobs was a surprise, as were the revisions to August and September reports.
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"I think markets are going to be on the defensive into the number," Briggs said. "Expectations are only calling about 30 percent for a December taper. The risk is that [the jobs report] moves it. Generally a little bit higher yields make sense to me."
He expects the bond market to stay choppy ahead of the Fed meeting.
"Risk appetites are low," Briggs said. "It's been a tough year for many fixed-income investors."
One fixed-income market that's had its share of selling is municipal bonds. The Detroit bankruptcy and other troubled credits, such as Puerto Rico, have roiled the market. It had a muted reaction to a federal judge's ruling Tuesday, formally declaring Detroit bankrupt.
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Muni experts say the credit concerns and expectations for Fed's taper have combined to drive outflows from bond funds.
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"I see it as credit positive in a perverse way," said John Donovan of Drexel Hamilton. "Today is maybe the first step in saying cities and municipalities can go into Chapter 9 bankruptcy and can use a restructuring process to take care of their problems."
It also cleared the way for governments in Michigan to cut pensions if necessary, he added.
Municipal bonds have traded better recently. Donovan said the MMD ratio, which reflects the yield of the 10-year high-grade muni versus the 10-year Treasury, reached 110 percent in September.
"That was due to mutual fund outflows, as a result of both credits" and concerns about tapering, he said
That ratio is now a more normal 96 percent—still cheap historically.
Blake Anderson, muni strategist at Mesirow Financial, said the way the media covers stories like the Detroit bankruptcy also influences market psychology, but the Fed is a big factor.
"The taper fears have tempered the public's appetite for long-duration bonds, and the credit story just adds anxiety," he said.
What else to watch
There is an OPEC meeting in Vienna on Wednesday, which is not expected to result in any change in production, though some members would like to see cutbacks.
Oil prices rose Tuesday after reports of the January opening of TransCanada's Keystone Gulf Coast pipeline, which will move crude from Cushing, Okla., to Port Arthur, Texas. West Texas Intermediate climbed 2.4 percent, to $96.04 a barrel.
Crude supplies in Cushing are at their highest level since July, or 40.6 million barrels as of Nov. 22. In addition to the OPEC meeting, EIA oil and gasoline inventory data come out at 10:30 a.m. ET.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.