ENERGY: No Sign China Will Get Involved in Iran Conflict: White House

St Louis Fed President Musalem (2025 FOMC Voter, hawk) gave an update on his scenario-based outlook for policy in a speech Tuesday, reiterating that overall he agrees with the "wait-and-see" approach adopted by the Fed amid heightened tariff-related uncertainty. Depending on how tariffs and their impacts play out, Musalem appears to suggest he could support either an easing bias; a "balanced" approach, or holding rates indefinitely. In the meantime, policy "is currently well positioned." (Speech text here.)

• "The range of possible economic outcomes for the next few quarters is wide. Economic policy uncertainty is unusually high", and "announced tariffs are higher, have been more broadly applied and have prompted stronger retaliation than I and many others had expected ["even after the de-escalation of May 12" re China-US]... if a cycle of high tariffs and retaliation is sustained, economic activity and employment are likely to moderate meaningfully over the next few quarters, and inflation is likely to rise."
• He notes that while economic activity has "moderated", and survey data suggest it could "slow appreciably", the economy "continues to exhibit underlying strength" with the labor market "at or near full employment. On inflation, while inflation has resumed progress toward 2%, "price pressures appear to be building".
• As such, "should tension between our dual mandate goals arise, I believe a balanced response to both inflation and employment is feasible— provided the public continues to expect inflation will return to 2%."  On that note, "while one survey of long term inflation expectations has risen [referring to UMichigan], other measures of longer-term inflation expectations have remained stable".
• He lays out two tariff scenarios, which he says are equally likely to play out: one is a modest/temporary impact on inflation in which a slowdown in activity dampens some of the inflationary pressures - "Under this scenario, a monetary policy of looking through the temporarily higher inflation and possibly easing policy to counter negative effects on employment could be appropriate." Though that carries a risk: "Getting the persistence of inflation wrong could prove costly, especially if persistent inflation leads the public to expect higher inflation to continue over the medium to long term."
• On a second scenario, the inflationary impetus from higher tariffs are more persistent, potentially due to multiple factors: "The pre-tariff starting point for inflation is above target;  The recent period of high inflation likely has raised the public’s sensitivity to it; Some measures of inflation expectations have risen; and  Tariffs apply broadly to intermediate inputs, encouraging rearrangement of global supply chains." In this case, "a balanced monetary policy that is responsive to deviations of inflation from target and to employment shortfalls will be appropriate, provided that longer-term inflation expectations are well anchored."
• He appends a third possibility in which trade tensions de-escalate, putting the US economy back on the path it was previously - in which case, "the current stance of monetary policy...will remain appropriate" (suggesting he would be supportive of a prolonged hold).

A new survey from Gallup has found that Americans' views on government deregulation are largely unchanged, despite growing deregulation movements on both the left and right. 

• Gallup: “…there are continuing calls for reducing regulation of business — from Trump, from many Republican lawmakers, from traditionally Democratically oriented thinkers like Ezra Klein and from business advocacy organizations like the U.S. Chamber of Commerce.”
• Gallup notes: “In recent years, the share of Americans saying there is too much regulation has hovered around the low to mid-40% range — 42% in 2024, 44% in 2023 and 46% in 2022. A relatively steady 23% to 27% of U.S. adults have said there is too little regulation. About three in 10 have said the level is about right… These attitudes have changed only marginally over the past 15 years.”
• Gallup adds: “We will have a new update on this measure in September. A reasonable prediction: The “too much” number will go down again. Republicans will likely be happier with the status quo under Trump. And Democrats will, if anything, become more likely to say there is too little regulation.”

Figure 1: Americans’ Opinions on Government Regulation of Business

Source: Gallup

Surge in Tsy quarterly futures roll volumes from June'25 to September'25 outlined below. Aside from the 5Y at 13%, percentage complete is still only 5%-10% across the curve ahead the "First Notice" date on May 30. Current roll details:

• TUM5/TUU5 appr 110,900 from -9.0 to -8.5, -8.88 last, appr 7% complete
• FVM5/FVU5 appr 303,400 from -3.75 to -3.25, -3.75 last, appr 13% complete
• TYM5/TYU5 appr 319,900 from -1.75 to -0.75, -1.5 last, appr 9% complete
• UXYM5/UXYU5 appr 42,700 from 3.25 to 4.0, 3.75 last, appr 3% complete
• USM5/USU5 appr 61,000 from 10.0 to 10.75, 10.25 last, appr 6% complete
• WNM5/WNU5 appr 23,900 from 6.0 to 7.0, 6.25 last, appr 5% complete
• Reminder, June futures won't expire until next month: 10s, 30s and Ultras on June 18, 2s and 5s on June 30. June Tsy options, however, expire May 23.