JPMorgan NFP scenario Analysis

NFP SCENARIO ANALYSIS

"We aimed to convey a clear message that we would support the labor market if it continued to weaken. The economy is robust, even stronger than we anticipated back in September. The risks in the labor market seem to be diminishing, growth is definitely more vigorous than we expected, and inflation is slightly higher than anticipated. Thus, the positive aspect is that we can afford to be a bit more cautious as we seek to find a neutral stance." – Jay Powell

Feroli’s predicts the addition of 275k jobs, surpassing the Street’s estimate of 215k. The previous report indicated 12k jobs, which was temporarily low due to hurricanes and strikes. For the unemployment rate (U.3), he anticipates 4.2%, above the Street’s estimate of 4.1%. For Average Hourly Earnings, he expects a +0.3% month-over-month increase and +3.9% year-over-year. Mike forecasts the Fed will cut rates in December, skip January, and then cut again in March, with additional cuts in both Q2 and Q3 of 2025. The bond market is pricing in a ~75% chance of a December rate cut, ~25% for January, and ~67% for March.

![5%] Above 300k. This tail risk would indicate a labor market that has overcome the soft patch seen in late Q3 and shows a resurgence in hiring. The downside risk for stocks arises from a bond market that adjusts yields higher to lessen or eliminate expectations for a December rate cut. This could lead to a "good news is bad news" scenario, at least for one day, with SPX potentially losing 50bps to 1%.

![30%] Between 230k – 300k. The Feroli scenario where the economy adds jobs but unemployment rises. This situation would temper expectations for runaway inflation while keeping December rate cut hopes alive. However, we might see a mixed reaction from the bond market, leading to increased bond volatility as rates investors diverge on the consensus regarding a December rate cut. While elevated bond volatility might be overlooked by stocks, we believe this scenario could yield the widest range of outcomes for stocks, with SPX potentially gaining 25bps to 1%.

![35%] Between 200k – 230k. The base case, indicating a recovery from the storm/strike-induced weakness observed in the November report. This type of outcome should keep the Fed on track for a December cut, likely reflected in lower bond yields, which would benefit stocks. SPX could gain 50bps to 75bps.

![25%] Between 130k – 200k. This would be a disappointing result for bulls, reflecting a weaker labor market and the subsequent negative impact on consumer spending, despite a strong start to holiday shopping. SPX could lose 50bps to 1%.

Below 130k. A job report missing by at least 85k could heighten growth concerns, particularly if the new jobs are primarily service-oriented or temporary. While bond yields may decrease, potentially bringing the 10Y yield close to 4.0%, this would result in a steepening for unfavorable reasons for equities. The SPX could drop by 75bps to 1.25%.

Regarding options pricing, for those expiring on December 6, the market anticipates a move of approximately 67bps.

In terms of US market intelligence, we expect NFP figures to exceed consensus, aligning with Feroli's estimate, as indicated in the asymmetric probability tree. Additionally, we believe the economy is poised for acceleration in the first half of 2025 as policy uncertainty diminishes. For further insights, please refer to our Morning Briefing published on December 2 and December 3.

We maintain a tactically bullish stance heading into year-end due to a favorable macro environment, earnings growth, and a supportive Fed. Positioning is not a hindrance, and there are positive influences from seasonality and buybacks. How much further can markets rise by year-end? One of the most common strategies observed by our Equity Derivatives team involves SPX 6200/6300 December call spreads, suggesting a potential upside of 2.8% to 4.4% from Friday's close. We believe it is prudent to capitalize on market momentum with minimal pullback risk until mid-January, just before Q4 earnings and Trump's inauguration. Some companies may provide less clarity in their guidance as they await policy direction during Trump's initial 100 days. Nonetheless, we anticipate robust Q4 earnings, with the market currently forecasting a 12.0% EPS growth, compared to 5.8% in Q3.