Why markets may cheer any weakness in jobs report

• June job gains are expected to be strong, with 195,000 nonfarm payrolls and unemployment steady at 3.8 percent.
• But markets may be hoping for some softness in hiring and in wage growth, expected at 0.3 percent, because of the warnings signs coming from the bond market.
• The yield curve, now increasingly watched across markets, is getting flatter and flatter — a potential warning of coming economic weakness and a sign to some that the Fed may be moving too quickly.

Construction workers lay carpet on a ramp from the West Wing offices to the White House colonnade.

Jim Bourg | Reuters

June hiring is expected to be strong, but markets may find some relief if Friday's employment report contains a softer jobs number and squishy wage growth.

The reason is the so-called yield curve has been quietly worrying the market, raising concerns that the Fed is moving too fast and the economy will not be strong enough for many more rate hikes.

The spread between the  and 10-year Treasury yields was just 28 basis points Friday morning, an 11-year low. While mostly the purview of the bond market, the yield curve is being widely watched across markets and is getting more and more attention in the stock market.

The flattening of the curve is viewed by some as a warning about coming economic weakness, but traders also view it as a warning sign the Fed may be moving too quickly and could bring on a recession.

The flattening also takes the curve ever closer to an inversion — which occurs when the short term yield rises above the longer term security's yield. That has been a reliable indicator of a recession.

The 2-year yield, at 2.55 percent Friday, has been rising on expectations for Fed interest rate hikes, with the next quarter-point raise expected in September. Meanwhile, the 10-year yield is not making much traction and does not reflect the real strength of the economy. Instead it is anchored by lower interest rates globally, but it also reflects worries about things like trade wars or other potential shocks that could harm the economy.

Economists expect 195,000 jobs were created in June, and that unemployment held steady at 3.8 percent, according to Thomson Reuters. Average hourly wages were expected to have gained 0.3 percent in the month, or 2.8 percent annually. Weaker wage growth would signal a lack of pressure on inflation, and that could give the Fed some breathing room.

The job growth may be tough to figure out if it's soft. There could be just too few workers to fill available jobs, or something more concerning — that companies are starting to hold off on hiring plans because trade actions, like the escalating tariff war between the U.S. and China, are creating uncertainty.

Stock futures were slightly weaker ahead of the jobs report, and bond yields were slightly lower.