Market participants will pay very close attention to two key upcoming readings on employment. This morning, the Labor Department reports initial claims for unemployment for last week. And tomorrow, they’ll give the initial reading (subject to revision) on job creation in November. A sense is growing that the readings will surprise on the upside, and show an employment picture that is improving slowly but steadily, suggesting that economic conditions are finally on the mend.

Interest rates are up moderately this morning ahead of the labor reports. Expect them to rise sharply if the employment picture is much better than expected. If the labor numbers are roughly in line, then rates should fall, in accordance with the “sell on the news” rule.

Markets have spent much of this year discounting a very strong global economic recovery, but the past several months have been marked by uncertainty about the extent of the recovery. Apart from investment spending in China, it’s hard to discern where the leadership for a robust recovery would come from, especially since US consumer demand (which ultimately is what makes Chinese investments worth making) is showing few signs of life. An uptick in US employment would give that story a huge boost by suggesting that demand could strengthen. (Not coincidentally, it would give the Administration something else to take credit for that they had little or nothing to do with.)

So far, this is all good stuff. But keep your eyes on interest rates. What if market rates break out of their trading range and start to rise in the middle of the yield curve, in response to an improved economic outlook? Then we’re a step closer to the inflection point where the Federal Reserve will start feeling pressure to raise policy rates, in order to curb fears of high inflation.

All of the Fed’s recent statements indicate a low-inflation outlook characterized by a huge amount of what they call “slack,” or industrial capacity underutilization. They’ve worked hard to set expectations for essentially zero interest rates well into the future, possibly throughout next year. A perception of improving conditions may cause them to change their minds.

If the Fed decide to go in this direction, it will only be after very careful deliberation. But if markets should form a perception that such a change is coming or even may come, they’ll move so fast you’ll get whiplash. And given that so much of the strength in global markets is coming from the dollar-funded carry trade, we could see some very disruptive readjustments in the months ahead. Stay tuned.