Thought I’d pose this question in light of the reported job cuts coming at Goldman Sachs.
Some relevant info from Bloomberg: • GS' overall earnings are down ~40% this year• Their IB revenue fell 41% in the second quarter; BUT• Trading revenue increased by 32%.
So my questions are will job cuts (at GS and elsewhere) be all/mostly in IB or are trading jobs on the chopping block too? How will this impact recruitment in sales & trading?
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Let’s think logically about this…
As rates rise, dealflow decreases. Decrease in dealflow means decrease in IB revenue
Conversely, as rates rise volatility has been rising. Higher volatility means increase in S&T revenue.
Why would you cut the people who are making a growing % of your profits?
I'll add to this since I think there's a need for clarification. Deal flow doesn't necessarily decrease when rates increase. What's more relevant for deal flow is the volatility that exists as a consequence of the Fed's guidance on rate decisions. If there is more uncertainty (as there still is now as of writing this in Feb 2023) on the path for inflation and, by a consequence, the strength of the labor market, then deal activity would decrease.
The reasons are simple:
If a client can't decide if rates are at their peak or may go higher, the client will wait, hence slowing deal activity. No client wants to go through a deal with the hope that the outcome of the deal will result in valuations decreasing. As such, a conducive deal environment would require at least the following:
- A non-volatile interest rate path.
- A point in time of the deal where rates are close to the peak, at the peak, or decreasing.
I'd suggest this exercise to illustrate my point. You can get the quarterly/monthly futures contracts for SOFR or Fed Funds (whichever is available) and plot out the price of said contracts in the next months/quarters to figure out what the market is pricing for the Fed's interest rate path.
You can agree or disagree with what the market is pricing but what really matters is what the Fed thinks the interest rate path would be which of course leads to (this time around at least) what the Fed thinks the path for inflation and labor market strength would be. Now, if the market and the Fed cannot come to an agreement due to the amount of uncertainty there is in the economy, then you can see that uncertainty reflected in the volatility of prices for said contracts.
With that exercise, you'd at least have a measure of volatility for the Fed's rate path. With higher volatility in said path comes a correlation to uncertain valuations and thus a shit deal-making environment.
In fact, STIR trading desks (i.e. desks trading front-end rates) are now making a comeback due to the resurgence in front-end volatility. Post-crisis, this desk used to question its own existence due to the Fed's suppression of volatility on the front-end of the curve. That period of time was also the best period in decades for deal-making. Going forward, this may or may not be the case once again (that's for you to decide), however, I hope this explanation makes it clearer how S&T jobs and IBD jobs are impacted by market conditions.
very coherent comment, thanks for taking your time to write it. +1
He is asking because sure there is volatility but also there will come to a point where the volatility stops and its just a slow decline or slow growth period, where S&T most def will be affected.
Exactly
.
Mmm good point
Bump
what do you want to know? no one here has a crystal ball that can answer your question
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