Bonds are telling one story and stocks another, and some strategists say Friday's jobs report could bring about a day of reckoning.
The bond market, even with Wednesday's post-Fed sell-off, has priced in economic weakness and priced out the post-election Trump reflation trade. The stock market, meanwhile, is bucking up against its highs, helped by an earnings season that is proving to be the best since 2011.
"I think it could be a turning point for the bond market but not the stock market. I think the stock market has it right at this stage," said Tony Roth, CIO of Wilmington Trust. He said the bond market trades much more on technicals and could react strongly to the jobs number, especially if it comes in super strong.
Friday's jobs report, if in lockstep with ADP payrolls data, could come in at around the 185,000 consensus forecast of economists surveyed by Thomson Reuters. ADP on Wednesday reported 175,000 private-sector payrolls for April, but the huge discrepancy between last month's extremely robust March ADP report and the surprisingly weak government report of just 98,000 nonfarm payrolls has made traders skeptical that they will align. ADP's March payrolls were revised down by 8,000 to 255,000.
The Fed has also put the spotlight squarely on the jobs report. In its commentary Wednesday, it said it viewed the weakness in the first quarter as transitory, and it also looked past even a drop-off in inflation. That makes the April jobs report, the most significant second-quarter data so far, even more important.
George Goncalves, head of fixed-income strategy at Nomura, said he believes there is a turning point coming for bonds, and he thinks it will be in the next several days. He said it will play out in the Treasury's auction of 10-year notes and 30-year bonds next week.
"That's going to dictate whether there's demand at these low levels of rates," he said, or rates will move higher. But first comes the jobs report, and a very strong number could make a big difference to the bond market, which has been registering one downside miss after another in the economic data.
"We have to finish the week above [a 10-year yield] of 2.35, 2.40 to start getting back into a sell-off, which would then validate equities and everything else," Goncalves said. The 10-year was yielding 2.31 percent late Wednesday, while the 30-year was yielding 2.96 percent. Yields move inversely to price. The 10-year's post-election high was just above 2.60 percent.
"I think the biggest thing that's hanging out here is the gap between the bond market and the stock market. They've both settled into trading ranges, and I think the bond market has to come back to the stock market because I think the long bond yield is too low at this point," Roth said. "If we get a 2.5 percent economy, which I think would be easy to achieve, I think the long bond [yield] has to be 30 to 50 basis points higher."
Roth said it would be a worry for markets if the April jobs report was less than 120,000 after the weak first quarter. But payrolls above 140,000 would be enough to show the labor market is tightening. "That is sufficient to [illustrate a] very strong labor market with increasing wage pressure, and we continue to see good capital investment on the part of business," he said.
The government's jobs report is released at 8:30 a.m. EDT Friday. For markets Thursday, there are several economic reports, including weekly jobless claims, international trade, and productivity and costs, all at 8:30 a.m. Factory orders are reported at 10 a.m.
More From CNBC