Australia’s Westpac Leading Index (month-on-month) fell to -0.1% in January. It was 0.08% in the previous period.
The Westpac leading index for January has flipped into negative territory at -0.1%, signaling that Australian economic growth will likely fall below its long-term trend in the coming months. This shift from slight growth to contraction is a key forward-looking indicator we must pay attention to. For us, this suggests it is time to position for a potential economic slowdown.
Implications For Equity Markets
This reading suggests downward pressure on Australian equities as corporate earnings expectations are revised lower. We should consider buying S&P/ASX 200 put options to hedge or speculate on a market dip through the second quarter of 2026. This move anticipates that weaker economic momentum will translate into lower stock market valuations.
A slowing economy makes the Reserve Bank of Australia less likely to raise interest rates and may even bring cuts into the discussion later this year. This outlook weakens the Australian dollar, making short positions on the AUD/USD currency pair attractive. The latest monthly CPI indicator showing inflation easing to 3.2% in January 2026 further supports the view that the RBA’s next move is more likely to be down than up.
Consequently, we anticipate that interest rate markets will price in a more dovish RBA stance. This makes long positions in 3-year and 10-year Australian government bond futures a logical trade, as their prices will rise if yields fall. This view is supported by the unemployment rate ticking up to 4.2% last month, a clear sign the labour market is softening.
We saw a similar pattern back in mid-2025 when the index briefly dipped negative, which preceded a period of market consolidation and a notable drop in business confidence. That period saw bond futures rally significantly before the index recovered. History suggests that acting on this leading signal is prudent.
With rising uncertainty about the economic path forward, market volatility is likely to increase from its current subdued levels. We can position for this by purchasing call options on the S&P/ASX 200 VIX index. This allows us to profit from an increase in market turbulence itself, which often accompanies economic turning points.
