Top 3 CIBC Global Markets Interview Questions

In the last number of posts I’ve been throwing around the soft-landing narrative quite a bit; something that started as a whisper earlier this year, believed by few, but that is now something that is the consensus position.

There is the possibility that market participants have gotten ahead of themselves in how much they’re believing in a soft landing because, as we’ll discuss below, it’s baked into everyone’s forecasts that inflation will accelerate over the next quarter. But there’s no getting around the fact that all indicators are pointing toward a soft landing being increasingly likely (inflation fluttering back to a level nearer target even as growth remains relatively robust and labor markets tight).

The more optimistic tune that markets are singing was only added to this week with Nick Timiraos – the WSJ’s Fed Whisperer – suggesting that the Fed is undergoing “an important shift” in their mindset and is likely to pause at the September meeting.

Perhaps the biggest surprise of this year is that Goldman’s wage inflation theory turned out to be correct even though many were skeptical it held water. Goldman’s theory was simple: in order for wage inflation to come down, job openings needed to decline. In other words, there wasn’t a need for layoffs to put downward pressure on wages, as many classically assume, and thus there was no need for a significant slowing of economic growth. This, in the US context, seems to have been borne out in recent months with wage inflation falling and overall inflation following suit. However, in the UK we’re seeing a different story with employment falling, wage inflation still at extraordinarily high levels, and overall inflation still closer to its peak than the BoE’s target (plus, growth just fell 0.5% last month – all together, not a great recipe).

Everyone agrees that wage inflation at elevated levels - in the US context, anything above 4% - is incompatible with a 2% inflation target. However, it’s still anyone’s guess as to exactly how to most efficiently and effectively break wage inflation without breaking the labor market. In the US, we’ve seen a seemingly immaculate decline (perhaps driven by declining job openings, perhaps not). In the UK, we’ve seen (thus far) persistent wage pressures that are becoming increasingly unmoored to overall economic activity and employment – a situation reminiscent of the stagflationary past, and the reason why BoE Governor Bailey has been pleading for folks to stop demanding such high wage increases (although it’s not in anyone’s individual interests to listen!).

Note: Since this post is nominally about CIBC sales and trading interview questions, it’s worth mentioning that wage inflation is still elevated in Canada at around 5% -- an acceleration over the prior month – and the overall employment picture is a bit of a mixed bag. However, growth has largely stalled and has started this quarter off quite slowly. This puts the BoC in a tough spot and they’re hoping that economic softness in the present will translate into softer wage gains in the future so that additional rate hikes aren’t needed.

CIBC Global Market Interview Questions

Below are three market-based interview questions that’ll be stylistically similar to what you’ll get in a sales and trading interview. As I mentioned in the Scotiabank post last month, if you’re interviewing in Canada then you should know where some economic indicators in Canada are, what the BoC is anticipated to do at their next meeting, etc. However, it’s more than fine for your answers to open-ended market-based questions to focus on US markets, as the purpose of market-based questions is to see how you think about markets more broadly and how you articulate your answers.

1. Why do you think US rates are continuing to selloff despite the soft-landing narrative becoming consensus?
2. Given the rally in oil prices over the summer, do you think the rally can continue?
3. Where do you see core inflation going over the next six months?

Why do you think US rates are continuing to selloff despite the soft-landing narrative becoming consensus?

It’d be reasonable to think that if a soft landing occurs then the Fed will begin lowering rates to a more neutral level and that the yield curve will begin to normalize (i.e., yields across the curve will decline to roughly where they were pre-pandemic, when the labor market was tight and inflation was roughly at target just as would occur in a hypothetical soft landing scenario).

However, in the past month we’ve seen a reset of treasury yields across the curve higher (for example, there’s been a significant 2s10s bear steepening).

This uptick in yields across the curve can seem a bit contradictory, as it’s no one’s view that the Fed is going to be meaningfully raising rates from here. But there are a few possible explanations here. For example, Praveen Korapaty, Goldman’s Global Head of Interest Rate Strategy, has floated the idea that the rapid rate hike cycle we’ve seen, and the economy’s resilience in the face of it, is signaling to investors that the economy can tolerate structurally higher rates. Therefore, the Fed will be reluctant, moving forward, to contemplate lowering rates as economic growth will remain robust enough (i.e., there’s no need to stimulate by lowering rates, as that’d make the economy run too hot, just like in 2021, and risk provoking inflation to return).

In other words, everyone is looking back to the experience of the post-GFC era when Fed Funds near the zero lower bound resulted in inflation only occasionally touching target, and growth that was always a touch disappointing. However, we could be entering a new era of structurally higher rates. Here’s how Korapaty puts it, “Indeed, we’ve argued for a while that investors have been underpricing medium to longer term real rates, perhaps because they were incorrectly indexing to the last cycle. Current levels of interest rates are actually consistent with our model estimates (and analysis) of fair value.”

The other major explanation, the one you’ll hear on most trading desks, is that the rates market is currently inundated with supply due to the large deficit currently being run and there’s a lack of commensurate buyers (in other words, the uptick in yields is just a supply and demand story). There are a number of reasons for the lack of buyers: it’s partly because of the significant yields offered by corporate credit and the large amount (over $100bn this month) now being issued, it’s partly because traditional buyers like Japanese insurers are finding sufficiently attractive yields at home now, and it’s partly because domestic banks are not adding to their portfolios after having done so much over the past few years.

Given the rally in oil prices over the summer, do you think the rally can continue?

Since late June, Brent has increased nearly 30% to $90/bbl. This is a welcome development for OPEC+ as they’ve been trying (to no avail) for most of the year to move oil prices higher. However, it seemed like no matter how much they cut, or how much oil demand bounced back, the market wouldn’t move (much to the consternation of Jeff Curie at GS who was calling for a rally all year, and then got one just as he departed from the firm).

It's impossible to pinpoint any one thing that finally broke oil out into this rally we’ve seen. But it’s likely the market realizing, as Jeff Curie and his colleagues have been saying for over a year now, that there’s a large oil market deficit that shows no sign of abating.

Today, the oil market’s deficit position is 2.3mb/d with constraints on supply from the aforementioned OPEC+ cuts and ballooning demand. In fact, oil demand rose to an all-time high in August due to US demand reaching levels above pre-pandemic highs and China demand beginning to bounce back after a 2022 slump.

Currently GS is forecasting a 12-month ahead Brent price of $93/bbl, with the possibility of oil reaching into the $105-110 range if OPEC+ cuts are extended out further into 2024. However, there’s likely not too much room to go (i.e., prices hitting into the $120 range) as OPEC+ will want to increase production back to more normalized levels and take advantage of these higher prices.

Further, even though there hasn’t been an uptick in US shale production thus far, if prices remain in the $100+ range for too long it’s anticipated that production will ramp up significantly. And, for OPEC+ members, they’d ideally like to keep US shale production sidelined as US shale is a bit like a cruise ship: once it gets going, it takes a long time to come to a stop.

Where do you see core inflation going over the next six months?

Regardless of how you look at it, the underlying inflation trend has slowed considerably in recent months, and this has spurred risk-on sentiment throughout markets (i.e., equities rallying, credit spreads tightening, etc.).

But the thing that’s omitted in the popular press is the unanimous consensus that this is a temporary dip, and that inflation will begin inching up in coming months. The only real question for markets is whether we see a subsequent dip after this new wave of inflationary pressure.

As GS said in a recent note, “We expect monthly core CPI inflation to rise from 16bp in June and July to the low 20s in August and September and about 30bp from October through January, and core CPI services ex-housing to rise from an average of 14bp over the last three months to 45bp over the next six months.”

Today we got the latest CPI print that came in slightly hotter than consensus – and quite a bit hotter than Goldman’s prediction. CPI was 0.6% MoM (consensus: 0.6%) and core CPI was 0.3% (consensus: 0.2%).

The market reaction, predictably, was a spike in yields although it’s begun to fade as the print was only modestly hotter than consensus...

Getting back to the question at hand, the driver of the increased inflationary pressure in the coming months is partly mechanical. The last two CPI prints overstated how much slowing was occurring – especially in the core services ex-housing number that Chair Powell has frequently cited as something he looks at carefully – because of seasonality and the way health insurance is calculated (both of these have been negative contributions that’ll turn in coming months).

For example, CPI’s health insurance component is based on calculating health insurer profitability to determine the rate of monthly health insurance inflation for the next twelve months. This makes health insurance inflation a roughly static value after its periodic calculation, and over the past year it was judged to be -4% and is expected to re-rate at +1% next month (leading to an increase of 4bp per month on core CPI and 12bp per month on services ex-shelter moving forward).

Here’s how Goldman sees core services ex-housing moving in the coming months as education and healthcare costs – that typically operate on a lag to other cost increases – move higher...

Counteracting this, shelter inflation, which operates on a significant lag, should continue to decline based on real-time measures. And, when it comes to overall core inflation, goods inflation should continue to decline (i.e., auction prices on used cars are down 11% and that’ll feed into a deflationary impulse).

The issue we’re faced with here – and that the FOMC will need to carefully weigh in their November meeting – is that we’ve gotten the “benefit” of significant core goods and shelter cooling this year. However, we’re still running well above target even with some temporary deflationary impulses occurring. The question then becomes if an acceleration of demand growth based on stronger than expected economic growth, and supply-side rebalancing being closer to the end than the beginning, will mean structurally higher inflation over the next six months that then forces the Fed into a more hawkish stance (i.e., core goods returning to normalized levels, instead of being a drag on inflation prints, as core services remains running hot – thereby leading to higher overall prints).

It's not a question of if inflation – regardless of if you’re looking at core or headline – will accelerate in the coming months. This is the consensus view, and something per se priced into markets. The question is the magnitude of the increase, the contributions to inflation, and if under the surface it appears that the inflationary picture is or is not one conducive to fluttering back down to a value closer to target next year.

And, against this backdrop, is the possibility of prolonged energy price spikes – gasoline was the largest contributor to headline inflation in today’s report, coming in at 10.5% MoM – that could lead to a reacceleration of other CPI components. In inflationary periods, looking at CPI and its derivations is immeasurably difficult: there’s a lot of noise and a lot of lagging data. This is why it was wrong for folks to overindex the rosy inflation prints of the past two months and would be equally wrong to overindex today’s less rosy print.

Conclusion

The past month has been quieter in markets with weak trading volumes across asset classes. This is pretty typical since August is the month most market participants try to jam in their summer vacations, so the only time things get too exciting is if there’s some exogenous event that happens.

The predominant story right now is inflation – more particularly, if it will remain sufficiently subdued as to not warrant further rate hikes this year. Everyone is in a bit of wait-and-see pattern, as Mike Cahill, a senior FX strategist at GS puts it well, “With the economy chugging along (our GDP tracking is now north of 3%) and some employment data picking up again (eg claims, ISM), I expect the market to increasingly focus on cyclical aspects of the CPI report – things like travel services and food away from home. I’m not sure the market has fully digested the slight reacceleration Spencer & team are expecting over the next few months. Even though the market has taken out some 70bps of cuts for next year, I still think there is more to go if our economic forecasts are broadly correct (and note that if anything we’ve been revising them stronger).”

Although we’ve covered some good talking points here for market-based questions, be sure to also focus on behavioral and technical questions too (some of these are covered in the much longer sales and trading interview questions post and the sales and trading overview). The best way to differentiate yourself is through strong market-based answers, but you don’t want to drop the ball by failing to have prepared for classic behavioral questions. Also, if you’re interviewing at CIBC in Canada, be sure to also check out the Scotiabank post from last month where a few Canada-specific behavioral questions (that are a bit quirky!) are discussed.