Consumer Confidence Falls, Debt-Ceiling Deal Faces Major Test

S&P 500 FORECAST:

• US Consumer Confidence slides to 102.3 from an upwardly revised reading of 103.7 in April
• Sentiment data fails to spark volatility as markets remain focused on the U.S. debt ceiling
• President Biden and House Speaker McCarthy struck an agreement to suspend the debt limit for a couple of years, but several Republican lawmakers are trying to stall the deal in Congress

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A popular gauge of U.S. consumer attitudes worsened in May, dragged down by increased pessimism about the short-term outlook for income, the current business environment and general hiring conditions, a sign that Americans may soon begin to rein in spending – the main driver of the country’s economic activity.

According to the Conference Board, consumer confidence declined to 102.3 from an upwardly revised level of 103.7 in April, beating estimates for a more subdued reading of 99.00. Although the result was better than expected, there is no major silver lining, as this is the fourth time in five months that sentiment has deteriorated.

Despite disappointing data, the survey’s results failed to trigger a strong reaction, as traders remain focused on the U.S. debt ceiling saga. Although President Biden and House Speaker McCarthy have struck an agreement to suspend the debt limit through 2025, the deal still faces roadblocks, with several hardline Republicans threatening to block the final bill.

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Looking ahead, traders should watch how the situation plays out in Washington in the coming days. While Congress is likely to pass legislation to fund the government at the eleventh’s hour, further delays could unleash volatility, as the U.S. could run out of liquidity to pay its obligations as early as the first week of June.

Focusing on the S&P 500, the index has been trending higher in recent weeks despite numerous headwinds, with most gains driven by the “AI” mania. In this context, breadth has been quite narrow, pointing to poor market internals. For a rally to be durable and sustained, strong participation is often required.

In terms of technical analysis, the S&P 500 is hovering above support near 4,200 at the time of writing. If this floor holds, bulls may soon be able to launch an attack on 4,310, the 61.8% Fibonacci retracement of the 2022 selloff.

While market bias remains somewhat positive, bullish momentum appears to be fading. For this reason, traders should be prepared for the possibility of a pullback. In case of a setback, initial support rests at 4,200-4,185. On further weakness, sellers’ crosshairs will be fixed on the 50-day SMA near 4,140.

S&P 500 TECHNICAL CHART

S&P 500 Futures Chart Prepared Using TradingView