Cantor Fitzgerald Sales and Trading Interview Questions

In my last post – on the eve of the Fed’s rate cut cycle – we discussed how the history of rates over the last few years has been a Lucy-and-the-football situation: the market pricing in a significant number of rate cuts in anticipation of lower inflation, economic weakness, and/or labor market softness; data coming in hotter (for inflation data) and/or stronger (for economic and labor market data) than expected; those rate cuts being pushed out to the next quarter; and this cycle repeating again and again and again.

On the surface, it appeared that the September FOMC meeting was going to finally be the point at which Charlie Brown made contact with the football before Lucy could yank it away. And, of course, that was true to a degree. In fact, on the eve of this inaugural rate cut markets had moved from pricing in a near 50bps cut in favor of a 25bps cut, so the Fed surprised most when a 50bps cut was delivered (one of the few times in the last few decades where the Fed didn’t try to keep its actions aligned with market pricing to avoid creating unnecessary rates volatility).

However, in my last post I mentioned that even though a rate cut of some kind – whether it be 25bps or 50bps – was going to come, the rates market was probably getting ahead of itself in terms of the number of future rate cuts that’ll occur because there were some signs that inflation had room to surprise to the upside, the economy could continue to chug along even with restrictive rates, and the labor market could stabilize at normalized levels consistent with trend growth and not deteriorate further.

In other words, even though the Fed did cut – and signaled a willingness to cut further with the kind of predictability in cadence that we’ve seen out of the Bank of Canada in recent quarters – it was far from certain that merely because the Fed had begun its cut cycle, and signaled that more was to come, that it’d follow the rate path prescribed by the market pricing or its own dot plots.

And through the last month we’ve had a raft of data that signals that, once again, the market was premature in pricing in a large downdraft in rates with the predictable result that a significant number of these rates cuts have been priced out of 2025. The more things change, the more things stay the same.

However, layered over top of this classic script where the market gets ahead of itself pricing in rate cuts only to then roll them back when confronted with new data is a set of new ideas that are beginning to bubble to the surface: What if the end destination for this rate cut cycle (the neutral rate) is higher than anticipated? What if not only the front end of the yield curve, but also the entire yield curve, will remain more elevated than previously thought?

Because, despite the fact that rates are still restrictive (unless one believes that 500bps or more is the neutral rate) there’s no getting around that financial conditions right now are loose – with credit spreads at tights not seen since the GFC, equity markets making new all-time highs, the labor market remaining resilient even in the face of the hurricane-related disruptions we’ve seen, and economic growth continuing to surprise to the upside. Given this, how quickly should the Fed lower rates to add fuel to what appears to be a fire (financial conditions) that should be supportive of growth or at least not a drag on it?

And, of course, another complication to contemplate is the fact that no matter who resides in the White House in 2025 deficits will remain large – and, if significant tariffs are enacted, this could cause some additional inflationary pressures to feed through the system (although not as much as one might suppose, as I mentioned in my last post in discussing Goldman’s tariff analysis).

Elections are always times in which people talk about new paradigms, and it’s important to remember that most of the time these contemplated paradigms never come to fruition (i.e., Goldman’s view of a commodity supercycle that we were always just on the cusp of, but that never actually arrived). But nevertheless it’s always nice to have a new paradigm to mull over.

Even though most will read this after the election occurs, regular polls and betting markets aren’t the only way to try to get a pulse on the odds of what’ll occur. Goldman created little baskets of equities that they believe will perform best under a Rep or Dem administration and use their relative performance to gauge what the market believes the outcome will be. Right now, Goldman believes the market is pricing in around 60% odds of a Rep sweep – although, as FX strategist Mike Cahill said in a recent note, it’s hard to disentangle moves in election pricing vs. overall macro drivers when it comes to moves in equities.

Cantor Fitzgerald Sales and Trading Interview Questions

As usual, in this post I’ll be walking through a few markets-based questions on the major market themes or storylines that are dominating the conversation. Right now, all eyes are still on rates – but, as mentioned above, there are other storylines that are beginning to become intertwined with the pure rates pathway storyline, such as a renewed concern around the fiscal pathway in the US; global divergence in terms of growth and, by extension, rates differentials; and whether we’re in some new, structurally higher rates paradigm.

Why do you think that yields in the long-end of the curve have risen after the Fed’s 50bps rate cut?

Why do you think equities haven’t responded to the recent sell off in rates?

Short EURUSD has been a popular trade in recent weeks. What’s driven it, and will it continue?

Why do you think that yields in the long-end of the curve have risen after the Fed’s 50bps rate cut?

Since the Fed’s 50bps cut in September – the largest move since the GFC and perhaps a somewhat impulsive move since the magnitude of the cut was due almost entirely to the downward jobs revision – we’ve seen a reflation of the entire yield curve, but of most note 10s and 30s.

This move upward in yields has been interpreted by some as a signal that the market thinks the Fed has covertly abandoned its inflation mandate and is willing to grapple with higher inflation to protect the labor market. To steelman this argument, Powell made it clear at Jackson Hole that the Fed’s calculus has shifted: from concern almost exclusively about the path of inflation, to residual concern about inflation mixed with a newfound concern over labor market deterioration.

As such, although the Fed would never admit (explicitly) that they’re willing to continue to reduce rates to stimulate the economy in order to perverse labor market strength even if this comes at the cost of elevated inflation above target (say around 3%, or thereabouts), that's what they're engaged in.

This view seems to have been reinforced by the fact that no Fed speakers in recent weeks have issued a mea culpa that perhaps the 50bps move was unwarranted, and that a more traditional 25bps cut would’ve been more appropriate since we’ve had pretty rosy data over the last few weeks (i.e., jobless claims muted when hurricane impacts are stripped away, economic growth strong, inflation expectations nudging up, adjusted consumer sentiment strong, etc.).

Given this, the thinking goes that the rise in rates across the curve, but in particular out the long-end, has been a reaction to the fact that we’re going to be living in a world with higher inflation (so in order for there to be some term premia, in addition to real rates being positive, yields out the long-end need to rise).

In my view, this kind of argument is a bit too clever (or conspiratorial) by half...

First, it’s sensible for the Fed’s calculus to begin to shift since labor market deterioration will probably lead to inflation undershooting target, and there’s no doubt that rates are restrictive right now (even if, as mentioned above, financial conditions are loose). So it doesn’t matter too much if the Fed started off their cut cycle with 50bps or 25bps since rates are still restrictive now even if financial conditions are loose – in other words, the magnitude of this first move isn’t as important as the rates pathway and the ultimate end destination.

Second, there’s no need for more conspiratorial theories – of the Fed adopting some kind of shadow inflation target, unbeknownst to the public – when there are more compelling reasons that offer an explanation for the recent rise that are more mechanical in nature (although, to be fair, some very notable names have encouraged the Fed to adopt a slightly higher inflation target this cycle).

The most compelling – or at least conventional – interpretation of the rise in long-end yields is that in the weeks leading up to the Fed’s rate cut decision the narrative was almost completely inverted relative to what it is today: there was concern that the labor market was much weaker than anyone thought, and that the Fed should perhaps do a 75bps or 100bps move before it falls behind the curve. As such, yields across the curve came down in sympathy as recession probabilities were priced in (since the natural consequence of an actual recession would be yields across the entire curve – from the front-end to the long-end – falling significantly).

As it turned out, the data that’d follow the Fed’s cut would alleviate these recession concerns (i.e., recent payrolls of 254k and the unemployment rate dropping to 4.1%), but by the Fed going for 50bps off the bat it wiped out (in the mind of market participants) any significant concern that the Fed was behind the curve and that, in order to catch up in the future, the Fed would need to engage in a series of larger, more rapid rate cuts.

So, in some sense one could view the rise in yields as a normalization (as illustrated in the chart above) to recent highs due to the risk of the Fed being behind the curve and precipitating true labor market or economic weakness being taken off the table.

Layered on top of this is the election and the rising odds of a Republican sweep (note how the rise in back-end yields does coincide pretty nicely with the increasing consensus of a Republican sweep – although, by the time you read this, that sweep may or may not have occurred!).

In a recent Goldman note, it was noted that under a Trump administration 30y yields could push through to 5% on the back of enhanced tariffs, larger fiscal deficits, and (as a consequence of larger deficits) more 30y issuance. While under a Harris administration, deficits will be still be large (as they have been through the Biden administration, of course) but a bit more muted than under a Trump administration, and when combined with no new tariffs should allow the 30y to reset more toward 4%.

Regardless of who wins a few weeks from now, the consensus view is that we’ll be looking at a steeper yield curve as back-end yields stay elevated and the Fed continues to bring down rates (Goldman sees a 25bps cut in November and December, with a skip in January or even an appraisal of a longer duration pause if data keeps coming in so strong).

Or, as Will Marshall, Goldman's Chief US Rates Strategist, said in a recent note, “…given the importance of positive growth news in recent episodes of fiscal focus, whether or not the data continues to support the trend toward slower rate cuts to a higher level should have a significant bearing on the broader narrative around longer-term rate levels.”

Note: There has been a lot of chatter about Trump’s proposed tariffs and the impact they’ll have. However, even though there’s been a marked increase in odds of a Republican sweep, Goldman’s custom basket of tariff exposed equities hasn’t budged through this time period. Which indicates that market participants view all this tariff talk as posturing, and that broad based tariffs and an upending of trade policy isn’t a likely outcome.

Why do you think equities haven’t responded to the recent sell off in rates?

Something that’s bubbled beneath the surface over the last few years, and has come into sharper contrast in recent weeks, is how much equities have ignored the move in rates. Through the earlier part of 2024 the argument could be made that equities performing well, despite rates remaining high, was a transitory phenomenon because as rates reset to lower levels, once inflation was squashed and the Fed began its cut cycle, rates would then “justify” equity strength (skate to where the puck is going, not where it is now).

However, in recent weeks, as rates through the belly and long-end of the yield curve have marched up, with equites being largely unresponsive, some have begun to focus in on if, for example, SPX should trade at a 22x fwd. P/E multiple (95^th percentile vs. history) if belly and long-end rates are going to be higher for longer. Here’s a chart that shows the yawning gap between 30y real rates and the SPX fwd. P/E multiple that’s developed...

As is often the case, equities are reluctant to follow rates in the short-term, and it’s likely the case that many are looking through the recent rise in rates (perhaps thinking that too many rate cuts have been taken off the table, and that when it’s all said and done the Fed will cut to around neutral and long-end yields will settle around 350-400bps by mid-2025 as market participants thought would be the case only a few months ago).

With that said, Goldman came out with an interesting note a few days ago that illustrated that historically equities are able to digest higher (real) rates if the reason for those higher rates is heightened grow expectations (i.e., rates need to stay high because the economy is running hot and companies are able to achieve earnings growth either through higher volume, pricing, or some combination of the two).

But, on the flip side, if the reason for higher rates is higher inflation (against a sluggish economic backdrop) or due to some policy change (i.e., tariffs) then equities tend to fall (because, once again, this isn’t an environment in which a company is able to achieve outsized earnings growth – whether through enhanced volume, pricing, or some combination of the two).

More specifically, GS found that if real yields on the 10y rise by two standard deviations in a month (60bps in today’s environment, which corresponds to the amount 10s have risen since mid-September), SPX falls 4% on average. Or, put another way, a 50bps rise in real yields on the 10y tends to lead to a 1x compression of the SPX fwd. P/E multiple (which, as mentioned, stands at a rich 22x right now).

As Rich Privorotsky, head of EMEA Cash Equities at GS, said in a recent note, “Think if I did a straw poll the answer would have been equities are higher in a red sweep… But feels like the mood music is changing on the margin…. I fear that if a republican sweep delivered an acceleration of bond market volatility and higher real rates at a time when the starting multiple in the SPX is already in the top deciles it could be more of a headwind to multiples than a tailwind for growth… I’m still in the camp that stocks go higher in that outcome…”

In other words, in a theoretical context the rapid move in real rates should have an impact on equities. However, right now market participants think that a Republican victory in November will lead to higher real rates but that the negative impact on equites will be more than offset by looser regulation, more fiscal stimulus, etc. And, on the flip side, if there’s a Democratic victory than real yields will probably compress lower (as mentioned earlier, GS sees the 30y retracing back to 4% if Harris wins), and that means that the yawning gap shown above will compress back in a bit (although real yields will still be positive, and the SPX multiple will still be in the top decile, so not cheap!).

It's also important to keep in mind that what spurred the initial bond selloff (rise in yields) was that recession risks – which largely arose from the one-off jobs revision – have subsided, and this selloff has then been turbocharged by the increased odds of a Republican sweep.

So while equities have looked through this rise in real yields, perhaps because no one wants to react before the election outcome and its aftermath are solidified, if real yields inch higher it could start to have an impact on equities – especially because right now the equity risk premium is at the tightest level in 20 years.

Short EURUSD has been a popular trade in recent weeks. What’s driven it, and will it continue?

Short EURUSD has been one of the more popular macro trades of the last month, and for good reason. Through October alone we’ve seen an almost complete retracement of the YTD range.

The primary driver for the move has been the continued divergence of the US and EU economies in the aftermath of the Fed’s rate cut. As illustrated below, as the ECB cooled its heals on rate cuts and made some hawkish squawks over the summer – at least by ECB standards – and recession fears in the US arose with some suggesting a 75bps cut should be contemplated EURUSD moved higher.

However, as we’ve discussed ad nauseum above, the script has inverted on itself, with data in the EU coming in softer than expected, ECB speakers (i.e., Centeno) singing a more dovish tune, and data in the US coming in hotter than expected.

Layered on top of this, similar to what we’ve seen inform moves in rates and equites, has been the rise of the possibility of a Republican sweep, which (if tariffs are enacted) could continue to put pressure on the Euro-area's economy and by extension EURUSD (should there be a Republican sweep, it’d probably lock in a 50bps move by the ECB in December as they preemptively worry about the uncertainty that’ll come with a Trump administration).

Right now, based on the level of retracement that’s occurred, it’s reasonable to think there isn’t much left in this trade. However, of course, since a Republican sweep is not a foregone conclusion, and optimism about the US economy and permission about the Euro-area's economy is based on some pretty recent data prints, there is more room for the trade to run if there is a Republican sweep and if there is continued economic divergence (perhaps accelerated by the Republican sweep and the policies that could be enacted as a result).

GS believes that in the case of a Republican sweep, with broad based tariffs enacted soon thereafter, there’s around 10% additional EURUSD downside (in a more reasonable case, where tariffs are used more selectively, there’s a 3% downside). Plus, there could be further downside risk from the general uncertainty that comes along with potential major shifts in trade policy and, as mentioned, the ECB will probably try to get ahead of the curve through jettisoning their 25bps cut pace in favor of 50bps move at the December meeting.

Conclusion

There were many market participants who thought that the Fed’s rate cut would be the beginning of the end – that it would lead to yields gently fluttering down across the entire curve, and that rates volatility would be dampened as the Fed set out an almost perspective pathway for rates coming down to neutral by mid-2025.

Instead, it looks like we’re at the end of the beginning, and that Q4 2024 and 2025 will shape up to be volatile across all asset classes (when credit spreads are at their post-GFC tights and equities are in their top decile, that’s often a sign of vol to come since the party can’t continue forever).

Further, while it seemed in mid-2024 that all developed economies were on a similar pathway with slightly different timing, we’re beginning to see significant divergence in economic growth that could lead to rate differentials opening up more than market participants forecast with natural spillover into exchange rates (i.e., now that the BoC is so entrenched in its rate cut cycle, with economic growth being pretty lackluster, continued US economic growth could place the BoC in an awkward position as the rates differential gaps wider and even more pressure is placed on an already weak CAD).

One would be forgiven for having a bit of whiplash from how quickly the narrative on the US economic outlook has flipped in the last few months: from fears of a recession and labor market deterioration to a celebration of US economic exceptionalism and an economic engine that just won’t quit.

Right now – as is often the case around elections and in their immediate aftermath – uncertainty about the future is leading to price action across asset classes that isn’t entirely consistent (i.e., the relative strength of equities against a backdrop of a rise in real yields). Which means that the only certainty in these uncertain times is that we’ll have some volatility as new narratives about what the future holds are formed and market participants reposition themselves – and, for market makers, that’s the most important thing.