Top 4 Citi Sales and Trading Interview Questions and Answers

Among the large sales and trading franchies in the United States, Citi is quite underrated and isn't talked about nearly enough. It's hard to say exactly why they aren't talked about much. But it's likely a combination of factors ranging from poor marketing, a historically lackluster equities trading business, and residual stigma following the Great Financial Crisis in 2008 (remember that Solomon Brothers merged with Citi in 1998, and Citi was bailed out in late November of 2008).

While fixed income and equities trading revenue for almost all banks have outperformed heavily over the past few years, Citi has been one of the banks that has consistently outperformed analyst consensus estimates. 

Further, as we've previously discussed in other posts, most banks tried to diversify away from their sales and trading businesses from 2010 to 2020. However, this trend has recently reversed among nearly all banks as fixed income and equities trading brought in record revenue through 2020 and 2021 and acted as a countercyclical buffer to declines in other divisions.

While Citi heavily curtailed their sales and trading business in the wake of the Great Financial Crisis, they quickly regained their leadership in the fixed income league tables. Further, Citi went against the 2010 to 2020 trend and has been trying to move up the league tables in equities trading for the past six years. 

For example, in 2016 Citi implemented a plan to try to go from eighth or ninth in the equities trading league tables to fifth or sixth. Having accomplished this by early 2020, they then created a new plan in December of 2020 to try to move up to third or fourth in the equities trading league tables which they're making progress on. 

So this is all a long-winded way of saying that Citi has shown a remarkable commitment to sales and trading, and that makes it a great place to be.

Citi Sales and Trading Interview Questions

Like Goldman, Citi runs a rotational program that will allow you to get exposure to a number of different desks. So, like at Goldman, you'll need to think about where you want to go and advocate for yourself to make sure you can land on your desired desks throughout the summer.

But first you need an offer. So here are some market-based questions about the macroeconomic situation we find ourselves in right now...

1. Why do you think the Fed has suddenly turned more hawkish?
2. Even though inflation is currently very elevated, what arguments could you make for it still being somewhat transitory?
3. Do you think raising rates will really cool inflation?
4. Do you think the Fed can really engineer a soft landing?

Why do you think the Fed has suddenly turned more hawkish?

Well, the obvious answer is just that inflation is currently printing at over eight percent, so you could say that obviously the Fed would turn more hawkish in the face of inflation that's at multi-decade highs. But let's try to give a more nuanced answer.

Ultimately, what the Fed truly cares about most - more than its dual mandate of maximum employment and price stability - is maintaining credibility in the eyes of the market.

Because the reality is that over the past few decades the Fed's words have had nearly as much power as their actions have. We saw this in 2020 when the Fed announced a number of actions (i.e., the creation of the Secondary Market Credit Facility) to calm markets and the markets calmed before the Fed even implemented the actions. In other words, the Fed's words were enough to begin stabilizing markets because of the Fed's credibility.

However, how the Fed and the market interacts is a bit circular. The Fed sometimes leads the market, and the market sometimes leads the Fed. If the markets are pricing in that the Fed ought to do something (raise rates), and the Fed doesn't then the Fed begins to not only lose some credibility, but they introduce enhanced volatility into the markets.

Over the past few months the narrative in markets went from believing the Fed's narrative around transitory inflation to suddenly having nearly unanimous conviction that the Fed is behind the curve in raising rates.

So what's led to the Fed having a more hawkish tone is not only the inflation data that we're seeing (which is much higher than almost anyone expected), but also the fact that the Fed is at risk of losing credibility or losing control of the situation in the eyes of the market by not forcefully raising rates. 

Even though inflation is currently very elevated, what arguments could you make for it still being somewhat transitory?

The inflation we've recently observed has been quite unique compared to other inflationary episodes. While no one knows exactly what causes inflation, much less how to predict where it's going, we can safely say that three things have had an impact on the heightened inflation we're seeing over the past year:

• Aggregate demand has been boosted due to the unprecedented cash transfers (stimulus checks) to citizens from the federal government. However, this is a temporary effect and household balance sheets will return to normal as that money gets spent by households.
• Due to the pandemic, consumers heavily shifted their consumption basket to be more heavily weighted on goods than services. As a result, even if the same amount of goods were produced there was suddenly significant more demand for them (so prices rose). On the other hand, services didn't fall by an equal to the drop in demand for them as prices are sticky to the downside and service-related businesses were able to tap federal support programs to augment their fall in revenue. So, in the end services had a sharp drop in demand, but not such a sharp fall in prices. Whereas goods had a sharp rise in demand, with an equally sharp rise in prices. Theoretically as consumers begin to consume like they did pre-pandemic, that'll cause a fall in the price of goods (as the demand will lessen).
• Finally, due to the pandemic, as you know, there's been unprecedented supply chain issues that have affected the amount of goods available for consumers to purchase and how routinely they're available. However, as supply chains heal or reform then we'll see more goods being brought in to meet the demand, which will cause prices to normalize and stop their quickened growth.

You may think it's somewhat absurd to argue that inflation is still somewhat transitory. After all, this is what the Fed previously argued and they appear to have completely capitulated on the topic.

However, I think that the Fed still largely believes the most of the inflation we're currently seeing - but not all - is derived from exogenous factors that it has little control over, which is why they have been so hesitant to raise rates.

With that being said, I've long agreed with Larry Summers - going back to when he first started to warn of inflation in early 2021 - that even when inflation is being driven by exogenous factors you need to act to cool the economy because you can end up having a Wage-Price Spiral develop that begins to give inflation a life of its own (i.e., workers demand higher wages, companies raise their prices to pay for their higher wage expense, inflation rises and workers then demand higher wage again, etc.). 

The market was spooked last week after seeing the Employment Cost Index (ECI) spike to levels not seen for decades, which raises the possibility that a Wage-Price Spiral could be on the horizon if labor markets aren't cooled.

Do you think raising rates will really cool inflation?

My personal view is that part of the reticence that the Fed showed toward raising rates in Q4 of 2021 stemmed from their belief that raising rates would not necessarily have that big of an impact on near term inflation.

Picking up on what I brought up in the prior question, I think the Fed looked at the three factors I outlined and said to themselves, "Raising the overnight rate won't necessarily dampen down this excess demand chasing goods. Instead, we need to wait for household balance sheets to normalize, people to begin shifting their consumption away from goods, and supply chains to once again begin operating normally".

However, now that we've seen such elevated levels of inflation, the Fed feels compelled (either due to their own convictions or that of the market) to act by aggressively raising rates.

The mechanism by which the Fed raising rates will affect inflation is not through somehow fixing supply chains or making people change their consumption habits. Instead it will be via reducing asset values - as we've already seen in the equity, rates, and credit markets - which will have a negative wealth effect on households. In other words, it will make households feel less well off, which will reduce their consumption and thus cool price increases.

Further, raising rates aggressively enough could result in the broader economy beginning to buckle, thus sending unemployment higher, which also has the affect of cooling inflation.

While the Fed has a dual mandate of maximum employment and price stability, this has always been a contradictory mandate. Maximum employment should, theoretically, spur higher inflation. So the sweet spot for the Fed needs to be having some amount of slack in the labor force to cool wage increases, along with modest and predictable inflation. So by aggressively raising rates and getting a bit more slack in the labor market the Fed is hoping that will return inflation to a more normalized level.

You've likely heard a lot in the press about the Fed wanting to do a "soft landing". What this would mean, although the Fed would never explicitly this, is raising rates, introducing more slack in the economy, and having inflation return to a more modest level (all while avoiding a recession). Practically this would mean having a situation whereby in 2023 we see 5% unemployment (up from 3.6% currently) and 3% inflation (down from 8.5% currently). 

Do you think the Fed can really engineer a soft landing?

As the old saying goes, monetary policy is a blunt instrument. What the Fed has said that it's currently committed to is raising rates to the "neutral rate", which is a somewhat ambiguous level but is defined by the Fed as being around 240 basis points (2.4%). 

What the Fed is hoping for, as explained in the prior question, is to introduce a bit more slack into the labor force, reduce down speculative assets even further to create a negative wealth effect on households, and thus cause inflation to fall precipitously back down (remember that inflation needs to fall significantly to get back down to the Fed's flexible average inflation target).

While this would be wonderful to see, banks have been ratcheting up the probability of a recession significantly. Currently, Goldman sees the risk of a recession over the next two years as being 35%. 

Unfortunately, we have never seen a scenario where inflation is above 4% and the unemployment rate is below 4% that hasn't led to a recession within a few years. 

When you compound this reality with the fact that fiscal policy is not aligned with monetary policy (it's still very expansionary) then we are likely to see continued volatility in markets and some turbulence in economic data moving forward. 

What some market participants are thinking is that the Fed will do two aggressive rate hikes of 50bps each over the coming months and then wait to see whether that has a desired impact.

However, the Fed has painted itself into a bit of a corner by being so insistent that they will bring rates back up to a neutral rate (again, around 240 basis points) and they are unlikely to be able to do so quickly while really seeing whether or not anything in the economy is breaking as result of their actions. As a result, engineering a soft landing will take more luck than skill.

Conclusion

One of the best ways to stand out in a sales and trading interview is by being able to provide some level of depth to your answers surrounding what's occurring in the markets. This is why I put together four questions here that are all related to each other and that build upon each other. 

If you're currently gearing up for interviews, keep in mind that you'll get a diversity of interview questions (they all won't be surrounding the same topic as the questions above have been). So be sure to check out the long list of sales and trading interview questions I put together or the sales and trading primer. I've also put together distinct posts for fx interview questions and fixed income interview questions.

Citi is a great place to land. Not only because they've always been among the top sales and trading franchises, but also because they have a long-standing commitment to growing out their business. Further, I've always been a big fan of rotational summer programs and Citi offers one.