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 has moved into negative territory, falling to -0.1% in January. This points to Australian economic growth running below its long-term trend in the months ahead. The shift from small growth to contraction is an important forward-looking signal. For us, it suggests we should prepare for a possible slowdown.
Implications For Equity Markets
This result points to potential downside for Australian equities as analysts cut corporate earnings forecasts. We should consider buying S&P/ASX 200 put options to hedge or to take a view on a market pullback through the second quarter of 2026. The idea is that weaker economic momentum could push stock valuations lower.
A softer economy also makes the Reserve Bank of Australia less likely to raise rates, and it could even put rate cuts on the table later this year. That backdrop usually weighs on the Australian dollar, which can make short positions in AUD/USD more appealing. The latest monthly CPI indicator, which shows inflation easing to 3.2% in January 2026, supports the view that the RBA’s next move is more likely down than up.
As a result, we expect interest rate markets to start pricing a more dovish RBA. That makes long positions in 3-year and 10-year Australian government bond futures a logical trade, because prices tend to rise when yields fall. This view is reinforced by the unemployment rate rising to 4.2% last month, which suggests the labour market is starting to soften.
We saw a similar setup in mid-2025, when the index briefly turned negative. That was followed by a period of market consolidation and a clear drop in business confidence. During that time, bond futures rallied strongly before the index recovered. That history suggests it is sensible to pay attention to this signal.
With more uncertainty around the economic outlook, volatility may rise from today’s relatively calm levels. We can position for that by buying call options on the S&P/ASX 200 VIX index. This approach aims to profit from an increase in market volatility itself, which often shows up around key economic turning points.
Volatility Positioning Approach
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