Top 3 Jefferies Sales and Trading Interview Questions

Jefferies is best known for the investment banking side of their business, but they also have a robust sales and trading business that takes quite a few summer analysts each year.

Personally, I’m a big fan of how Jefferies’ has structured its summer analyst program as it provides the best of both worlds: you get all the benefits of a rotational program but still get to choose whether you rotate through equities or fixed income.

This stands in contrast to many other rotational programs that span the entire floor and encourage you to do at least one rotation in equities if your other two are in fixed income and vice versa (the downside of this approach being that if you have a particular interest in fixed income, there are many desks to choose from but you’ll only have the opportunity to rotate on two of them).

Further, through Jefferies’ forcing you to pick between equities and fixed income at the application stage, you have a much better idea of what kind of interview prep you should be doing (i.e., you don’t have to develop granular market-based answers focusing on equities if you’re applying to the fixed income rotational program!).

In last month’s post we did a deep dive on the “banking crisis” that was roiling markets – and, in retrospect, I think my more measured take on it has aged pretty well: the crisis didn’t precipitate any meaningful contagion, confidence was relatively quickly restored, and markets have settled down.

This was despite the best efforts of talking heads on TV and on Twitter to try to foment fear that we were living through a redux of 2008 – even though the “crisis” centered around securities that, if actually held to maturity, would assuredly pay back par. Thereby making the introduction of the BTFP an obvious way to soothe markets and assuage depositor fears.

Anyway, this post will be similar to those I’ve done over the past number of months: focusing in on current market themes, how to think about them, and what they portend for the future.

Note: I’ve written many times before that when it comes to sales and trading volatility is a good thing. And all the rates volatility of the first quarter proved that to be the case, with FICC revenue soundly beating expectations at JPM, Citi, etc. and buoying overall bank revenues.

Note: In the aftermath of the bank failures last month there were, obviously, significant deposit outflows. However, in the week ending April 5 these outflows not only abated but reversed themselves by rising $60.6b from the previous week and offsetting all of the previous week’s declines! This included a rise of $23.5b at small banks, laying to rest (at least for now) the notion that there would be deposit flight from small to large banks that could cause issues down the road.

Jefferies Sales and Trading Interview Questions

Here are some questions you can poke around. As you’ll see, some of these are drawn from an excellent Goldman research report that I’ll link to in the members area if you want to read the whole thing.

1. Why do you think rates volatility is so elevated right now?
2. Is the equity market complacent about recession risk?
3. What could derail a soft landing?

Why do you think rates volatility is so elevated right now?

In the wake of the collapse of SVB, Silvergate, etc. cross-asset volatility spiked significantly as a large-scale repricing rapidly took place. However, as you’d expect, rates saw the most volatility of any asset class.

This is partly because just prior to the collapse occurring the market narrative was that Fed Funds may need to go significantly higher than 5% -- an idea given support by comments from Chair Powell that growth was surprising to the upside and inflation was showing stubborn resilience.

However, the financial stability concerns raised by SVB, Silvergate, etc. quickly squashed this narrative and led to the two-year yield falling the most since 1987 as market participants started pricing in significant rate cuts latter into the year (one-year implied vol also reached levels surpassing the Great Financial Crisis and the 2000s Tech Bubble).

Put another way, the rates market was uniquely suspectable to a large infusion of volatility as the market narrative, in just a few days, radically changed from one extreme (that significant hikes were still needed) to another (that the Fed would soon pause and need to cut rates by the end of the year) which led to a radical repricing that has rarely been seen before.

In the past few weeks rates vol has come down from its extraordinarily elevated levels, but it hasn’t declined nearly as much as other asset classes. This is primarily because the level of repricing in the wake of the banking crisis was so severe that we’ve now had volatility to the upside as the crisis has passed and the market has tried to find an equilibrium.

Additionally, the market is still undecided on just how much further the Fed will go with recent data painting a mixed picture (headline inflation benefiting from energy price declines, which are now reversing, and core inflation remaining stubbornly persistent). Because of this, there’s significant vol as market participants continually recalibrate their views on if the Fed is done, has one more rate hike to go, or could continue apace.

This was compounded by the FOMC minutes showing that Fed staff thought a recession later in the year was possible, while at the same the Fed’s Waller said limited progress on inflation had been made and higher rates were needed.

Whenever the Fed begins to reach the end of a tightening cycle – and there’s no doubt we’re closer to the end than the beginning – the message always get muddled as folks try to figure out when exactly the pause will take place. So suddenly every piece of news that tips the scale one way or another is given more weight than it otherwise would have.

Is the equity market complacent about recession risk?

The resilience of the equity market – in spite of many viewing a recession as likely this year – has been perplexing to many market participants (i.e., Morgan Stanley’s Mike Wilson who has been at the forefront of calling for a significant earnings recession to take hold this year).

Per Goldman’s market-implied recession risk indicator, the probability of a recession over the next year is slightly greater than 50% (their house view is that the probability is 35%). But what appears to be happening in equities is that many are looking through any potential recession, betting that by the time one occurs inflation will be sufficiently muted that the Fed will have the ability to begin rapidly cutting rates to reinflate the economy.

Needless to say, there’s no definitive answer as to whether equities are being overly complacent on recession risks. But it does appear that the equity market is nearly fully pricing in a soft landing and nearly fully pricing out a hard landing. The level of certainty the market has can be partially seen through the relatively low levels of the VIX. If there was significant uncertainty about the outlook, you’d expect it to show elevated levels but instead the VIX has been (very) low and (very) well anchored. 

Below is a Goldman desk note from April 14^th explaining what they think is happening in equities right now. Basically saying that equities are no longer showing a lock-step relationship with yields as market participants increasingly think a soft landing is likely and that, as inflation subsidies, the Fed will begin to gradually moderate rates from their elevated levels (in other words, we’re in a temporarily high rates environment that can now be confidently looked through).

“NDX has dislocated from its 2022 relationship with bond yields–Since January, Large-cap tech investors have been willing to look through the elevated bond yields and price in an improvement in the cost of capital. The NDX is prematurely pricing in an economic soft landing where the Fed also cuts rates and credit spreads relax.”

And, in case you’re curious, here’s how equities have done following the final Fed hike over the past number of cycles. As you can see, it’s a bit of a mixed bag, which isn’t unexpected because sometimes the Fed pauses due to inflation having sufficiently abated, and sometimes because something breaks in markets forcing the Fed to pause before they’d like to…

What could derail a soft landing?

It’s important to keep in mind what a soft landing really means: that growth will be slowed just enough through rate hikes to sufficiently cool inflation before tipping the economy over into recessionary territory. And then, with inflation sufficiently cooled and the economy likely trending towards recessionary territory, the Fed can begin easing rates back down to a more neutral level to reinflate economic growth back to normalized levels – all without inflation kicking back up.

It should go without saying that the Fed is still in the early stages of trying to orchestrate this soft landing. But one of the reasons why the equity market has stayed so resilient this year is that we’re getting data that’s pointing in the right direction: economic growth is slowing (although the economy is more resilient than many have thought), headline and core CPI have fallen from their peaks (although core is stickier than many anticipated), jobless claims are slightly picking up, and job openings are declining.

In my view, the thing that is most likely to derail a soft landing is persistent wage inflation (if you’ve read my posts over the past year, then you know this is something I continually come back to). Because there is no getting around the reality that the current levels of wage inflation (by most measures) are inconsistent with the Fed getting inflation back to target (because consumers, in general, spend most of the wage gains that they receive so wage inflation feeds back into CPI).

Now everyone agrees that one definitive way to cool wage inflation is through creating significant slack in the labor market (i.e., rising the unemployment rate).

However, there are some, like Goldman, who believe that you don’t actually need the unemployment rate to meaningfully rise in order to get wage inflation back down to a level that’s consistent with the Fed’s inflation target. In other words, you can have your cake and eat it too.

What Goldman believes is that if there is a sufficient drop in job openings (not employment) that’ll lower the bargaining power that workers have to demand outsized wage increases. So, if there’s a sufficient drop in hiring, without employers actually letting go of their existing workers, then we could get wage inflation coming down sufficiently to cool the overall rate of inflation.

I’m slightly biased and always like giving GS the benefit of the doubt. But I have my doubts about their theory. Primarily because one of the (many) ramifications of the pandemic was that so many skilled blue- and white-collar workers took early retirement opening up large dislocations in certain sectors of the economy (often you’ll see this referred to as “skill gaps” that have arisen).

The consequence of this being that even if there’s a drop off in job openings for unskilled workers, or skilled workers in certain sectors of the economy, that doesn’t diminish the skill gap that will persist in other areas and, by extension, the ability of those employees to still demand (and successfully obtain) higher wages. And it’ll be of little use for an employer to show an employee the latest core services CPI ex-shelter print and say, “Hey, you really shouldn’t be demanding a 6% raise as the annualized rate of the last core services CPI ex-shelter print, which is something the Fed is looking at quite closely per Powell’s recent statements, came in at an annualized rate of just 3.5% recently!”

There are, of course, many different other things that could derail a soft landing: economic growth could surprise to the upside and force additional rate hikes until something breaks, there could be another war that drives commodity prices higher or creates supply chain issues, etc.

However, to my mind, the main issue is simply wage inflation. Because no one believes that the levels we’ve seen over the past year are consistent with returning to target. Therefore, the question is just how to get wage inflation to levels consistent with the Fed’s inflation target and whether that can be achieved without a significant rise in the unemployment rate (keeping in mind that a significant rise in the unemployment rate will likely necessitate a recession).

To track wage inflation, many rely on the Atlanta Fed’s wage tracker, and it recently ticked up to 6.4% after dipping slightly in previous months (the current level of wage inflation being shown by this tracker is consistent with around 5% overall inflation rate, so that’s not great).

But there are other measures that show a rate of wage inflation significantly below the Atlanta Fed’s tracker which is something that Goldman has pointed to in support of their thesis (i.e., that wage inflation is currently cooling as job openings have begun to dry up).

In particular, change in average hourly earnings data is showing a rate of wage inflation around 3.5% right now (a level that would be consistent with a 2-3% overall inflation rate). There’s also an interesting measure from BofA that they draw from their deposit data that shows a rapidly cooling level of wage inflation that would be consistent with a level of overall inflation perhaps even below target…

Note: We will soon find out if Goldman’s thinking is correct. The job-workers gap has fallen around halfway back to its pre-pandemic level and the quit rate has fallen more than halfway (keep in mind job switchers tend to have much higher wage gains than those that merely get raises at their current job – that’s why many choose to quit as opposed to staying put!). Plus, alternative ways of measuring wage inflation, as referenced above, are showing a level of cooling that’s not being picked up (yet) by the Atlanta Fed’s model.

Conclusion

Following the market upheavals of last month, it somewhat feels like we’re in a holding pattern right now across equities, rates, and credit. This is reflected in vol coming down significantly across the board (especially in equities) as everyone waits with bated breath for the next catalyst up or down to arise.

Anyway, hopefully this post has given you a bit to think about, and as mentioned earlier in the members area I’ve put a fantastic recent report from Goldman where they go over a number of questions that are defining markets right now and give their views (although, as also mentioned earlier, their views do tend to be a bit rosier than most others!).

If you have an interview approaching, whether at Jefferies or elsewhere, be sure to not focus only on market-based questions. In the long sales and trading interview questions post, the main types of questions you’ll be asked are given along with many more examples (you should also take time to read the sales and trading overview as well to get more familiar with desk structure, etc. in case you haven’t already).