The continuing combination of potentially strong economic reports and positive earnings -- not to mention a meeting of the

Federal Open Market Committee

-- will vie for the market's attention early in the coming week as momentum builds toward Friday's employment data.

Forecasts call for another big increase in nonfarm payrolls, which could cause stocks to slide further as more signs of a strengthening economy encourage fears that interest rates will be lifted sooner rather than later.

"The market is wary about too much economic growth," said Robert Pavlik, portfolio manager at OakTree Asset Management. "If we have reports that show the economy is expanding at too fast of a rate, people are going to start pulling back from stocks."

Indeed, fears of too much economic optimism have partially fueled the market's declines of late. The

Dow Jones Industrial Average

closed the last week down 2.4% -- its second down week in a row -- and dropped 1.4% in April. The

Nasdaq

plunged 6.3% last week and declined 1.7% in the month, while the

S&P 500

fell 2.9% in the week and 2.2% in April. All three indices had their third losing month in a row.

Already the market has been underwhelmed by the recent round of generally strong first-quarter corporate earnings. That, combined with the fact that stocks tend to drop when economic news is positive, has Joe Veranth, executive vice president and portfolio manager at Dana Investment, expecting market movement to be lackluster next week.

The FOMC meets Tuesday, but analysts are not expecting a rate increase. Any change in monetary policy will be announced around 2 p.m. EDT.

A strong economy gives Federal Reserve Chairman Alan Greenspan a reason to raise rates by perhaps 25 basis points by June or July, said Pavlik, which could coincide with the Fed's big two-day meeting, which starts on June 29, but is still far away enough from the presidential election this fall.

However, no piece of data may loom larger than the Labor Department's employment report, to be released Friday at 8:30 a.m. EDT. The U.S. job market is expected to have added about 175,000 nonfarm payrolls in April, similar to the prior month's outlook before actual results came in much stronger at 308,000 nonfarm payrolls.

But Pavlik hopes the nonfarm payroll number comes in below expectations. "I would like to see a weaker number to slow this ramp-up in concern over inflation and interest rates," he said, adding that he doesn't want the economy to stumble but would be comfortable with a more moderate growth rate.

The unemployment rate is expected to remain unchanged from March at 5.7%, and average hourly earnings are expected to rise 0.2%, from a 0.1% increase in the prior month.

Pavlik also will focus on the hourly wages numbers. "The Fed will certainly concentrate on targeting what it costs for employers to pay employees, because it sees that as a source of inflation," he said.

Veranth said if nonfarm payrolls come in really low, "the market would see a bit of a rally, and some of the expected interest rate increase will pull back out of the market."

However, Veranth expects three interest rate increases in 2004 -- two before the presidential election and one before the end of the year. He expects between 150,000 to 300,000 nonfarm payroll additions in each of the next few months, including April, "reflecting the strong economy that's already in place."

"March was the first big number we got," added Veranth. "Combined with Greenspan's testimony a couple weeks ago, that prepared the market for the Fed to move more toward an inflationary bias."

Veranth explained that a raise in rates would be good for the stock market, because it would help curb inflation. "In the long run, stocks are capitalized based on future earnings. To the extent there's inflation, it hurts future earnings streams," he said. "The core issue is that higher inflation is bad news for stocks; to the extent that the Fed can fight inflation, it is good news for the stocks."

David Rosenberg, chief North American economist at Merrill Lynch, suspects the Fed will wait on its decision to lift interest rates. He doesn't believe inflation is entirely a concern yet because of the mixed trends in the labor market.

"With all due respect to the 308,000 print on nonfarm in March, the folks at the Fed don't seem to be buying into the number as much as market participants have. ... The economy hardly hit the ball out of the park in March and April data so far are looking suspect," he said, citing in part

TheStreet Recommends

Wal-Mart's

(WMT) - Get Report

news on Monday that April same-store sales are coming in toward the bottom of its positive 4% to 6% guidance. (Wal-Mart is generally seen as a gauge of consumer spending.).

As a result, Rosenberg expects patience. "Keep in mind that

the Fed kept the funds rate at 3% through all of 1993 just to make sure that its principal concern would be totally quashed -- the health of the banking sector." Rosenberg said bank stocks rose 7% in 1993 when the Fed kept rates at 3%, so if broad inflation measures level off around 1.5% to 2%, the Fed could do the same now.

Even before Friday's employment report, several potentially market-moving economic reports will be released over the course of the week. On Monday, March construction numbers and the Institute for Supply Management's report on manufacturing will be released. Tuesday has the FOMC meeting and the March factory orders report. The ISM's report on nonmanufacturing will be released on Wednesday.

On Thursday, the preliminary reading of first-quarter productivity levels will be released. Economists are calling for a 4% increase, up from the fourth quarter's 2.6% increase. Initial jobless claims also will be out on Thursday; analysts are generally expecting results similar to the prior week's 338,000 claims.

Earnings reports are lighter next week. Several companies from the energy sector will be reporting. Other notable companies issuing reports include

InterActiveCorp

(IACI)

on Monday;

Tyco International

(TYC)

on Tuesday;

CVS

(CVS) - Get Report

on Wednesday;

EchoStar

(DISH) - Get Report

and

Pixar

(PIXR)

on Thursday; and

Martha Stewart Living Omnimedia

(MSO)

on Friday.