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Strong jobs report could be next source of market fireworks

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Jobs Report: Next challenge for stocks

July's employment report is expected to show a continued strong pace of jobs growth and the lowest unemployment rate since August 2008—good news for the economy, but possibly bad news for markets.

Already markets are beginning to find dark clouds in what were once silver linings. Stocks fell sharply Thursday in part on the idea that an improving economy and pickup in inflation could push the Fed to raise interest rates more rapidly than expected.

Economists expect to see 233,000 nonfarm payrolls and unemployment at 6 percent when the report is released at 8:30 a.m. EDT. That is down from the 288,000 jobs added in June and an unemployment rate of 6.1 percent.

"If we really got a hot wage number and both the unemployment rate goes to a five handle, I think there's a possibility people will move up their rate hikes expectations by year-end," said James Paulsen, chief investment strategist at Wells Capital Markets.