Tuesday, October 6, 2026

Macro Musings · Daily Briefing · Tuesday, October 6, 2026

The tariffs were supposed to shrink the trade deficit but the deficit just bought an AI data center instead

US Goods trade deficit up 8% Last 20 Months vs. 20 Months Prior. The US goods and services trade deficit has widened sharply to around 4% of GDP, driven by surging capital goods imports for AI data centers, with tariffs failing to shrink the deficit and New York Fed research showing tariffs contributed nearly 3 percentage points to goods price inflation.

Personal Stakes · Est. read time 3 min

In 30 seconds: The US goods and services trade deficit has widened sharply to around 4% of GDP, driven by surging capital goods imports for AI data centers, with tariffs failing to shrink the deficit and New York Fed research showing tariffs contributed nearly 3 percentage points to goods price inflation. The 10-year Treasury yield has climbed to 5.34% with real yields near 3%, driven by rising debt service costs, mortgage market convexity events, and persistent services inflation, creating significant volatility in the yield curve and weighing on rate-sensitive assets. The S&P 500 reached its 28th all-time high of the year, surpassing 7,800, driven largely by AI-related stocks, though equal-weighted indices lag and breadth remains uneven beneath the surface. Saudi Arabia's East-West pipeline is operating at reduced capacity following a September attack, while Hormuz flows remain near 14 million barrels per day and Vitol's CEO describes a three-phase oil market crisis spanning crude, refined products, and shipping.

The US goods and services trade deficit reached roughly 4% of GDP as of August, and the trajectory is not encouraging. Imports rose 4.3% month-over-month while exports managed only 1.4%, a mismatch that tells you everything about where the pressure is coming from. Computer and associated parts imports are now running at an annualized pace of $900 billion, or about 3% of GDP, up 2 percentage points from 2024. Meanwhile the non-petrol goods deficit annualized at $1.7 trillion in August, and exports have softened, likely on lower gold re-exports. Over the past 20 months, the goods deficit widened 8%, from $1.92 trillion to $2.06 trillion. By February 2026, tariffs had contributed 2.9 percentage points to goods price inflation, and without them goods prices would have fallen slightly. About one quarter of every point in higher tariff rates shows up in consumer prices within a year. In the battle between tariffs and conventional macroeconomics, conventional macroeconomics is currently winning. China's export volumes are still growing 10% year-over-year while its imports ex gold are growing 0%, and there is no sign it will be self-correcting.

Treasury offering for sale. The yield curve itself has been exhibiting unusual volatility. Sharp flattening down to September lows was followed by an immediate, full retracement across both the 2s10s and 2s30s curves. ISM Services Inflation: 74.

The S&P 500 closed at 7,818.93, up 0.58% on the day, marking its 28th all-time high of the year. The index has now cleared 7,800 for the first time. Trailing EPS up 30% from a year ago. The gains, it turns out, are unevenly distributed — the cap-weighted S&P 500 is up 15.2% YTD while the equal-weight version trails at 12%, and strip out AI entirely and you're looking at just 7%. The two indices are being pulled apart, with the weaker companies succumbing. Options markets are leaning into the momentum. SPX fixed-strike vol is up again today, suggesting long call demand as traders reprice upside movement. Someone placed a 20,000-lot long call spread at the 7,850x7,860 call fly, taking a flier on that area via a cheap structure. Single-stock call implied vols are moving higher too. When the options market starts buying lottery tickets on an index already at record highs, you are either witnessing irrational exuberance or the part of the movie right before the protagonist makes a terrible decision. The answer might be both — earnings are doing real work here, but so is the AI premium baked into the index's biggest names.

The Saudi East-West pipeline is now moving 5.8 million barrels per day, down from roughly 7 million barrels per day before the attack — that is a meaningful haircut. The two largest lines are fully dedicated to crude. Bypass pipelines add extra barrels on top of that. You could also read it as evidence that more than 20 percent of pre-war flows remain offline. WAF grade discounts to Dated: $20 a barrel. Into this the G7 agreed to release 100 million barrels, reportedly in exchange for the US agreeing not to ban diesel exports.

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