The advance report on the international trade balance for goods showed the deficit narrowed more than expected in May to $91.1 billion from $97.1 billion amid lower trade activity.

A 2.7 percent import contraction that reversed the 2.1 percent advance in April mostly explained the smaller deficit in May. The data showed consumer goods imports imports fell 7.3 percent after rising 2.8 percent in April. Industrial supplies declined 5.9 percent and foods, feeds and beverages were down a further 3.0 percent. Capital goods and autos brought some offset, with gains of 1.3 percent and 0.9 percent, respectively."Other goods" imports rose 6.7 percent.

Meanwhile, exports decreased 0.6 percent as a result of declines concentrated in two categories: foods, feeds and beverages plunged 14.2 percent and industrial supplies were down 3.0 percent. All other main sectors recorded higher exports, including an 8.7 percent gain for autos and a 4.3 percent advance for consumer goods that was not enough to reverse the 7.6 percent drop recorded in April.

With today's data, Econoday Consensus Divergence Index is at 34, consistent with an economy that is appreciably stronger than expected, keeping the pressure on the Federal Reserve to remain on edge.

The US goods deficit (Census basis) is expected to narrow by $4.6 billion to $92.5 billion in May after widening by a very steep $14.5 billion in April to $97.1 billion.

This monthly report offers advance import and export data on the goods components of the monthly trade report. Goods make up roughly two-thirds of the nation's exports and roughly three-quarters of imports.

Note that data in the advance goods report are accounted for on a census basis and can differ slightly from subsequent data in the international trade report where goods data are accounted for on a balance of payment basis to adjust for changes in cross-border ownership.

Changes in the levels of imports and exports, along with the difference between the two (the trade balance), are valuable gauges of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect the value of the dollar in the foreign exchange market.

Imports indicate demand for foreign goods here in the United States. Exports show foreign demand for U.S. goods. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States, since this trade imbalance creates greater demand for foreign currencies.

Market reaction to this report is complex. Typically, the smaller the trade deficit, the more bullish it is for the dollar. Also, stronger exports are bullish for corporate earnings and the stock market. Like most economic indicators, the trade balance is subject to substantial monthly variability, especially when oil prices change.

It is also useful to examine the trend growth rates for exports and imports separately because they can deviate significantly. Trends in export activity reflect both the competitive position of American industry and the strength of domestic and foreign economic activity. U.S. exports will grow when: 1) U.S. product prices are lower than foreign product prices; 2) the value of the dollar is relatively weaker than that of foreign currencies; 3) foreign economies are growing rapidly.

Imports will increase when: 1) foreign product prices are lower than prices of domestically-produced goods; 2) the value of the dollar is stronger than that of other currencies; 3) domestic demand for goods and services is robust.