Societe Generale Global Markets Interview Questions

It’s probably not a bad time to do a post on Societe Generale since the dominate macro theme of the last few weeks – or at least the one that everyone is trying to understand – revolves around France and the surprise snap election called by President Macron.

It seems like the relative lack of vol across markets has led to many hyper-focusing on a legislative election that could or could not result in significant policy changes. I don’t think this level of hyper-focus makes a ton of sense right now – and getting 50+ page think-pieces from Morgan Stanley on the how OAT/Bund spreads will move when there’s so much unknown seems like more of an academic exercise than one of that’ll map onto reality when it’s all said and done. (I’ll upload this report in the members area if you’re curious).

Some would argue that because there was a six standard deviation move in the 10y OAT/Bund spread after the surprise election announcement all the coverage we’ve seen is warranted – but this move brought us back to the spread that existed less than a year ago, not some unprecedented level.

Regardless, with vol suppressed across all asset classes (as shown below) the developments in France added a bit to rates vol which, as we’ve touched on before, is the real life blood of any flow desk, so was welcomed by rates traders.

Remember that increased vol (typically) equals increased trading activity and (typically) increased spread regardless of the asset class. In other words, disorderly markets (within reason) are almost always more profitable than orderly markets – and this is the primary reason that FICC trading revenue has been softer across most banks, including SocGen, relative to 2023 since things have been a bit more calm as of late.

Societe Generale Global Markets Interview Questions

SocGen has a pretty well developed global markets program and has maintained a steady position within Europe (their revenue numbers have been quite strong relative to their peer group). In this post I’ll keep my regular theme of talking through a few markets-based questions based on where markets are today...

1. What was the impact of President Macron calling a snap election in France? Why was it so significant?
2. How strong is the US labor market? Is it consistent with a soft landing?
3. If expansionary fiscal policies are continued or expanded after the upcoming US election, what would be some hedges that’d perform well?

What was the impact of President Macron calling a snap election in France? Why was it so significant?

When European markets seem to be humming along nicely – with minimal volatility – rest assured that within a few months some mini-crisis will hit that sends markets into a tizzy. This time around, President Macron’s decision to call a snap election was the mini-crisis (emphasis on mini, of course). After the announcement, France’s 5Y CDS exploded higher and equities in France and, to a lesser degree, the EU moved lower (before stabilizing over the last week, although there's still quite a bit of volatility as the election approaches).

The decision to call the snap election came on the heals of the European Parliament elections that saw Rassemblement National (RN) snatch 31% of votes, which was more than double Macron’s Renaissance party’s votes. This outcome was baked into markets, since the result was consistent with earlier polling. But wasn’t baked in was that Macron would take the political gamble of calling an election in the hopes that the European Parliament results wouldn’t read through to the legislative election. (Macron will remain President until 2027, although will have less room to maneuver if there’s a RN legislative majority.) Here’s the state of the polls (plus the latest one that shows there hasn't been much compression)...

For most market participants on this side of the Atlantic, the amount of vol that was inserted into markets (especially in rates) after the decision to call the snap election came as a surprise. Whenever there’s a surprising geo-political development, vol will increase – but most wouldn’t have anticipated as much vol as was inserted in the immediate wake of the election announcement.

I have no interest, and no ability, to hold forth on French politics, so won’t do so. However, per Barclays, most of the immediate reaction came from a belief that the party manifesto of RN will be consistent with their actual legislative priorities once in power (which seems to be putting a lot of weight on a party actually following through with what they say they’ll do – for better or worse, it often doesn’t work like that!).

Here’s Marine Le Pen’s 2022 program, as summarized by Barclays:

Regardless of the relative merits of any particular policy proposal, the main issue for France, which has recently been downgraded by S&P one notch, is deficit expansion – from either a slowing of the economy or from increased spending.

It seems like for the last four years expansionary fiscal policy has been a backburner (or non-existent) concern for market participants – despite the fact that it was the dominant concern of participants for EU economies in the 2010s.

It’s worth wondering whether we would have seen such a sharp market reaction if it weren’t for the former UK Liz Truss’ mini-budget that sent markets into apoplectic shock over here unfunded spending plans – which caused her to back down and led to a leadership crisis.

Markets seem to be pre-emptively anticipating that a similar script will unfold if Le Pen tries to push through fiscal policies that are inline with her 2022 program. In other words, the declines we saw were largely because the set of possible outcomes for French markets (i.e., a negative shock to equities if RM holds a majority and pushes through an even more expansionary fiscal program or onerous banking regulations) has enlarged.

On the other hand, as Barclays also notes, it’s not usual that in the runup to elections in Europe that spreads gap wider (vs. bunds) and equities underperform until the legislative priorities of the new government are better understood. In both Italy and Spain this script played out, and in both cases market participants found that their fears were unfounded (especially in the case of Italy where there’s been a lot of spread compression).

So the risk premium inserted into French assets over the last few weeks does make sense: there is an outcome where reckless fiscal policy could put further downward pressure on risk assets and cause spreads to gap wider. However, there’s also the possibility that more responsible governance prevails and that the current dislocation represents an opportunity that can be taken advantage of.

You should think about all of this as more of a probability distribution where one downside case, that wasn’t previously priced in, is now being priced in at some low level of probability – and as that probability either increases or decreases then risk assets, like equities, will decrease and increase, respectively. Given how enlarged deficits have been across developed markets for the last four years, in conjunction with the still elevated rates environment, the market is beginning to show signs of trying to discipline countries that are trying to pursue any kind of expansionary fiscal policy (whether through unfunded spending increases or unfunded tax cuts).

Of course, the US is arguably the worst offender when it comes to running expansionary fiscal policy in the face of full employment and elevated inflation (if there were ever a time not to run expansionary fiscal policy, it’d be in this kind of environment!). But one of the benefits of having the largest and most liquid asset class in the world, and the world’s reserve currency, is that markets tend to overlook that reality (or at least provide a longer leash than with sovereigns like the UK, Canada, France, etc.).

How strong is the US labor market? Is it consistent with a soft landing?

I’ve talked a lot about Jan Hatzius (Chief Economist at GS, also someone who often makes an appearance during the summer analyst training week to give a talk) over the last year, and Goldman’s out-of-consensus call in the midst of 2022-23, when an imminent recession was the prevailing view, that the labor market would rebalance, wage inflation would abate, and that inflation would flutter down to near target (thus achieving a soft landing of at or near full employment and inflation that’s at or near the Fed’s target).

Goldman’s call has been right so far, and we have seen a sizeable labor market rebalancing occur without a significant uptick in unemployment. However, as Goldman now notes, there are soft spots in the labor market that have developed when you dig beneath the surface – this full employment looks a bit different than the pre-pandemic full employment we saw.

Right now, most metrics are pointing in the right direction (i.e., metrics are becoming increasingly consistent with labor market that is sustainable at full employment without stoking further inflation). For example, the quits rate is down because the job-workers gap has closed, and the job-workers gap closing has led to wage inflation coming down to a level near (although still likely above) a level that’s consistent with the Fed’s inflation target. All the while, the unemployment rate has remained largely steady and the percent of firms with positions they’re not able to fill is around what it was pre-pandemic so there’s still some level of demand-side strength.

However, there are some soft spots in the labor market that raise some questions: primarily over whether the moderation in the labor force is simply the first step toward a much weaker labor market that’ll raise unemployment and bring on a recession. In other words, it’s fantastic that all the metrics above are coming down from their elevated level – but are they going to stabilize at levels that are consistent with full employment and inflation around 2%, or are they going to keep drifting lower.

The first weak spot is around the bizarre spread that has arisen between the household survey and payrolls which some have pointed to as a signal that payrolls is obscuring real employment weaknesses. The household survey unperformed payrolls by 0.7m in 2023 and 1.4m (!) so far this year.

Goldman’s explanation for this is two-fold. First, that the household survey is often noisier (in both directions) than payrolls and has trouble tracking young people’s employment. Second, that the household survey uses Census population estimates based on the 2022 American Community Survey – so it completely misses the recent immigration surge.

The second weak spot is around the unemployment rate itself, which has nudged above the 2018-19 average. Goldman handwaves this away by saying that when you look under the surface, most of the job losses have come in interest rate sensitive areas.

So, in Goldman’s view, as rates normalize (fall) due to the labor market rebalancing and inflation moderating then hiring will pick back up in these sectors and the unemployment rate will stabilize roughly where it is today. In other words, the role of higher rates was to cause a loosening of the labor market – which, as you’d expect, happened most in the most interest rate sensitive sectors – so as rates begin to normalize (fall) labor markets will remain around as tight as they are now because hiring will pick back up in these sectors. It’s a delicate tightrope to walk.

Here’s Goldman’s best attempt to quantify how much misses across key labor market data would inform the Fed’s rate cut calculus. As you’d expect, a significant miss on continuing claims or the unemployment rate (them increasing) would lead to a higher percent chance of a rate cut relative to what’s currently priced in. Whereas a significant miss on leading indicators (i.e., the hiring rate) that may or may not translate to higher unemployment in the future would move the Fed much less.

If expansionary fiscal policies are continued or expanded after the upcoming US election, what would be some hedges that’d perform well?

There’s no doubt that we’ve seen an almost immaculate drop in inflation over the last year (albeit with a temporary Q1 2024 increase). Right now, Goldman believes that core PCE (the Fed’s preferred measure) will be around 2.7% year-on-year by the end of 2024 (the Fed’s own projection is 2.8%).

However, some market participants are concerned that inflationary pressures are liable to return after the election as both major party candidates seem unified in their desire to enact loose fiscal policies and increase tariffs – even if these policies, by definition, work against the attempt of monetary policy to get inflation back to target.

In a recent GS note, they found that a 1pp upside surprise to US inflation has on average led to real returns of +7%, -3%, and -4% for commodities, bonds, and equities, respectively.

As you’d expect, GS found that gold offers the best protection against an inflationary backdrop that’s informed by the credibility of a central bank coming into question or a broad geopolitical shock (which for Goldman’s purpose includes significant tariffs, since they’re disruptive and typically raise geopolitical tensions).

Whereas energy typically outperforms when inflation emerges from an economy that’s simply being run too hot (similar to how all real assets, like real estate, tend to outperform when an economy is running hot but monetary policy is loose or at least not restrictive enough to cool growth).

With the Russia-Ukraine conflict that began in 2022, we saw a brief case study of Goldman’s thesis in action. Because the negative supply shock that arose from the sanctions put on Russia, combined with the rapid post-pandemic recovery and the ensuing inflationary pressures from an economy that was run too hot, saw real returns of -8%, -16%, and +22% for equities, bonds, and commodities, respectively.

Goldman’s overall framework here is pretty standard (when inflation is elevated, real assets perform better). But what has caught many by surprise is how Goldman is putting this framework into action. Due to their concerns around post-election fiscal policy, regulatory tightening, geopolitical risks, and tariffs their base case for gold at the end of the year is $2,700/toz or around 16% from where we are today.

Further, that’s the base case: they think that significant financial sanctions / tariffs, combined with expansionary fiscal policy, could lead to an additional 15% upside. Or there could be an additional 15% upside if there’s a one standard deviation widening in the US CDS spread if the market, similar to in the wake of the great financial crisis, suddenly becomes preoccupied with the current US fiscal trajectory (markets tend not to care about deficits until suddenly they do – as we saw in 2010-2011).

Like I said, this is all a bold call and is out-of-consensus right now. It’s a call that markets will begin to shift toward the belief (regardless of who wins the upcoming election) that some level of fiscal discipline needs to be enacted – although, as some believe, that may expose the fact that the out-sized growth and tight labor market we’ve enjoyed over the last few years has been largely driven by the unprecedented fiscal deficits we’ve run.

So, ironically, fiscal discipline may precipitate a recession that then requires larger deficits to be run to lift the economy back up. Either way, it’ll be interesting to see how Goldman’s call plays out (Goldman hasn’t always had the best track record on commodity calls – especially on oil through 2022-2023 where their demand-side thesis was right, but they didn’t appreciate how much of a supply response could still come out of the US).

Conclusion

I mentioned earlier that the snap election in France seemed to (modestly) shake markets from their low vol stooper. However, in a broader sense, we’re still in a low vol environment – and one of most common refrains you’ll hear from market participants is that markets (across almost all asset classes) seem eerily quiet right now (perhaps too quiet).

While all eyes are on equities hitting new highs – well, a handful of equities hitting new highs which is dragging the major indices to new highs – something that hasn’t been acknowledged, or at least internalized, by most is the slowdown in growth we’ve seen over the last few quarters in the US. Growth was 4.1% in 2023H2, whereas it should land around 1.6-1.8% for 2024H1.

Right now, most expect growth to pick up in 2024H2 – and given how much financial conditions have continued to ease as of late (with oil rangebound, yields falling, and equities at all-time highs) that’s not an unreasonable expectation.

However, at the same time real income growth has softened; there are some early indications that consumers are curtailing spending; consumer sentiment has fallen; housing starts have surprised to the downside; inflation expectations have been strong despite the fact that gas prices, which normally informs them, have stayed muted; and the upcoming election could have some businesses waiting on the sidelines to see how the dust settles (especially those in regulatory-sensitive industries).

So, in a similar vein to the US labor market that we discussed above, the growth outlook isn’t quite as clear as one would hope – and that’s even showing up in the Fed’s GDPNow forecast which has whipsawed around as mixed data has come in over the last few weeks.

If you’re currently interviewing at SocGen – especially if you’re interviewing for a role in the EU – make sure to spend most of your time focused on EU themes (i.e., the trajectory of the ECB, etc.). Overall, an interview at SocGen will be no different than any other sales and trading interview: a mix of behavioral and markets-based questions, plus a few technical thrown in if you’re interviewing for a specific desk (make sure to review the longer list of sales and trading interview questions I put together to get a sense for the types of behavioral and technical questions that can crop up, and if you’re still trying to figure out what sales and trading really is then you might want to read my sales and trading overview).