"If the [jobs] number is stronger than expected, people may feel, here comes Trump with some stimulus at just the time when the labor market has tightened up, and that is going to say a lot about inflation. That's why higher rates are the fear," he said.
The employment report is also expected to be strong enough to reinforce the market's expectations that the Federal Reserve will hike rates, for the second time in 10 years, when it meets Dec. 14. A better-than-expected report would feed the growing speculation that the economy will heat up enough to cause the Fed to hike more than the two times it now forecasts for 2017.
James Paulsen, Wells Capital chief investment strategist, said that's a big psychological change for the market. "That's how far we've gone. That's like the good old days. I remember living through many, many payroll Fridays, where I was holding my breath that we had a weak jobs number. It seems like ancient history, but it's precisely what we fear for tomorrow. It is funny in a way, we're getting back there," said Paulsen.
The problem with the move in rates is not so much the level but the speed at which they've run up.
"I think this is a huge success when you think about a world that for eight years has been hanging on a deflationary abyss. You've got to at least enjoy this given that we can get some inflation," he said.
Stocks futures were lower Friday, after a mixed performance Thursday with the S&P 500 off 7 at 2,191. The Dow closed up 68 at 19,191 Thursday, and the Nasdaq was slammed, off 1.4 percent at 5,251. In the bond market, yields snapped higher with the 10-year yield at 2.49 percent Thursday, before it slipped back to just under 2.45 percent. The 10-year was at about 1.7 percent before Donald Trump won the presidential election and promised massive stimulus in the way of infrastructure spending and tax cuts.
Yields were lower Friday, with the 10-year at 2.43 percent.
"In some ways, given the yield move, the market's doing pretty good in here. I still think the market probably goes higher. It's probably OK with a 2.5 yield but not if it keeps going up 10 basis points a day," Paulsen said.
The jobs data comes after a particularly good week for economic data, from stronger consumer confidence to the best gain in manufacturing activity in more than a year.
"What's left to prove at this point? … I think we're down to debating the little nooks and crannies of whether there's 98 percent or 100 percent full employment," said Stephen Stanley, chief economist at Amherst Pierpont. Stanley expects to see 200,000 jobs added, and he said wage growth should slow from October's pace of 0.4 percent to a gain of 0.2 percent.
"The average [job growth] so far this year has been 180,000. We did 160,000 in October. 200,000 in November just gets us back to that," said Stanley.
Diane Swonk, CEO of DS Economics, expects to see 185,000 jobs. "I think there's upside risk to the number," she said, noting that a slight change in manufacturing would make a big difference in the number. "The wild card is retail because of the secular shift form bricks to clicks, and it's not a one-off in warehousing."
The stronger-than-expected jump in this week's ADP private sector payrolls to 216,000 jobs was behind some of the expectations that Friday's government employment report could be better than expected. In the bond market there was the concern it could also show a bigger-than-expected jump in wages. But economists expect average hourly wages to be subdued, with the 0.2 percent translating to about a 2.5 percent annualized pace, after a surprisingly high rate of near 5 percent in October. According to Thomson Reuters, they also expect the unemployment rate to remain unchanged at 4.9 percent.
Goldman Sachs economists raised their forecast Thursday to 200,000 nonfarm payrolls, and they expect the unemployment rate to move slightly lower to 4.8 percent. In a note, they said they do believe there will be some hurricane-related rebound, after weather related swings in October in retail, construction and leisure and hospitality. They note that some of the biggest declines were in Florida and South Carolina, both impacted by Hurricane Matthew.
Since the financial crisis, the November employment reports have surprised to the upside two-thirds of the time, with an average 27,000 jobs above forecast, the Goldman economists said.
As for the bond market, the reaction is expected to be bearish Friday if the 8:30 a.m. employment report is strong.
"There's a new psychology in the market. We've spent so long looking to buy rates, we've switched around," said Aaron Kohli, interest rate strategist at investment banking firm BMO. He said the impulse is no longer to believe that rates will keep going longer after years of low rates.
"We always tend to focus on the headlines. What's more important this time around is the hourly earnings. You could be adding stimulus into a market where labor conditions have already tightened and wages are moving up," Kohli said.
Stanley said yields may stop rising when the Fed moves. "They're just pushing higher and higher and nobody has the conviction to stand before the freight train. At some point it will turn around, either before or after the Fed," he said. "I would argue that the level of yields we're getting into now are more consistent with where they should have been."