As stocks sold off Thursday, bond yields dipped on a surge in buying interest. Prices move inversely to yields. The 10-year yield was at 2.34 percent, the lowest level since Dec. 8 and the 30-year fell to 2.94 percent, a level it has not seen since November.
"I think if anything people were caught short off the Trump trade, and there's worry tomorrow's jobs number might not be as firm as hoped," said John Briggs, head of strategy at RBS.
Stocks closed well off their lows, but the Dow ended down 42 at 19,899 and the S&P 500 fell 1 to 2,269. The Nasdaq however, gained 10 points to 5,487, an all-time high. Amazon.com was a big winner, up 3 percent, as brick-and-mortar retailers continued to get crushed. Macy's was off 14 percent amid weak sales and massive store closings.
"The Treasury market is pricing in a disappointing [jobs] number, versus the consensus. If we get a 170,000 nonfarm payrolls or higher, that will be a negative for the Treasury market, and we'll get a relatively quick reversal of this bid," said Ian Lyngen, head of U.S. rate strategy at BMO.
Lyngen and others said the market is doubting some of the exuberance around President-elect Donald Trump's plans for economic stimulus and tax cuts.
"We have priced in so much optimism in terms of real growth in the new year and what the Trump administration can deliver in terms of fiscal stimulus," said Lyngen.
Market talk Thursday focused on how it may take longer than some traders expected for Washington to pass stimulus and tax cuts. Lyngen said Fed minutes, released Wednesday, highlighted the fact that central bank officials are uncertain about the impact of Trump's fiscal package and tax plans. While they mostly expected a positive effect, the outlook is still unclear.
He said that hit the dollar overnight and the sentiment continued to affect trading Thursday. On Thursday, there was also a congressional hearing on cyberspying, and that highlighted the disagreement between Trump and some in Congress over whether U.S. intelligence on Russian hacking is correct.
"The world is coming to the realization that politics in Washington could delay any economic impact from Trumponomics," said Lyngen.
Stephen Stanley, chief economist at Amherst Pierpont, dismissed the bond market gloom on the employment report. He expects to see 210,000 nonfarm payrolls, helped by hiring by retailers around the holidays. He said there was a lack of retail hiring in October and November reports.
"Wages, after having been down outright in November rebound at 0.3. That would be a big swing in the year-over-year number," he said. "My guess is it will flip to 2.75 percent year over year. ... You are at last seeing a gentle uptrend in wage growth at this point."
Scott Redler, partner at T3Live.com, said if there is a weak report, it might ultimately bring in buyers for stocks. A very strong report could make stock investors nervous that the Fed will have to speed up its rate-hiking cycle, while a weaker report would be more neutral for the Fed.
"A light jobs report would bring some weakness in, but I think it will be bought," he said.
Besides the employment report, there is international trade at 8:30 a.m. and factory orders at 10 a.m.