The employment report is the mother of all economic data. To push the war vernacular further (too far, perhaps), news from Iraq and economic data are currently battling for the hearts and minds of market participants. So far this week, it's been no contest, as major stock proxies have risen in conjunction with the progress of allied forces, despite a string of lousy economic reports.

The March employment report at 8:30 a.m. EST could change all that. Or at least help tilt the market's focus from what one trader called "Iraq around the clock" to something more aligned with fundamentals.

The consensus forecast is for nonfarm payrolls to decline by 40,000, while the unemployment rate rises to 5.9% from 5.8%, according to Briefing.com. Anything substantially weaker than that and stocks could swoon, especially given the spate of earnings warnings late Thursday by firms such as PeopleSoft ( PSFT) and Affymetrix ( AFFX) (to name just two of many).

If there's any major setback on the war front as well, then things could really get nasty for those betting on a continuation of recent gains by stocks and the dollar. Late Thursday, the latest war news included reports of an ongoing battle for Saddam Airport -- erroneously reported to be in allied hands earlier in the day -- and a blackout in Baghdad for the first time since "Operation Iraqi Freedom" began. There were also signs of Shiite demonstrations against Saddam Hussein in Umm Qasar, Reuters reported.

Despite overall allied military success, "traders could curtail the advance by Friday, as the entry to Baghdad culminates a new stage in the war, characterized by the more uncertain combat environment of urban warfare," commented Ashraf Laidi, chief currency analyst at MG Financial Group. "Another reason to trim the dollar's and stocks' gains could be the expected deterioration in the March payrolls, which could fall by as much as 85,000."

A fall of 85,000 jobs probably would curtail the rally, since it would be more than double the expected drop, as noted above. A drop of 85,000 jobs also happens to be the forecast of David Rosenberg, chief North American economist at Merrill Lynch.

"We expect the March employment report to be weak on all fronts," with the exception of construction and hiring to replace reservists called to active military duty, Rosenberg wrote Thursday evening. "We look for broad-based declines and see a downside risk as the number of persons receiving unemployment benefits surged from February."

Meanwhile, the economist expects the jobless rate to rise to 6%. The Conference Board's measure of "jobs hard to get" has risen sharply in the past two months to its highest level since 1994, but that has not (yet) been reflected in the unemployment data, he noted. "This suggests upside risk to the unemployment report in the next couple of months."

The intermediate-term outlook aside, the one positive aspect about a big decline in Friday's payroll data is that few market participants will likely be surprised by it. Derivative products designed to provide a direct hedge against economic data show participants are expecting a decline of 65,000 jobs, Reuters reported. (The derivatives are offered by Goldman Sachs and Deutsche Bank.)

Recall that on Tuesday, a steeper-than-expected drop in the Institute for Supply Management's manufacturing index was largely sloughed off. Why? Some traders said the weak Chicago Purchasing Managers Survey the prior day was a harbinger of a likely fall in the national ISM report. Thursday's sharper-than-expected rise in weekly jobless claims might prove to be a similar tip-off to the March jobs data. Traders suggested the stock market's fade Thursday afternoon may have reflected such anticipation.

How this all pans out on Friday remains to be seen, of course, but some volatile swings intraday Friday seem quite possible. If shares fall early due to a weak jobs report, they could rally later in the day if there's more progress on the road to Baghdad or traders decide they simply can't afford to be short ahead of potential regime change by Monday -- which now seems less far-fetched then back on March 21. Conversely, some traders might be wary of being exposed to a potential weekend of negative war news (and more warnings after the bell Friday).

Rosenberg dubbed the employment report the "main event," but acknowledged "the war is still the headline news."

So maybe the jobs data isn't quite the main event, but economic news will likely move up from the market's under card Friday, at least in the early going.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.