ASX sector performance

The ASX 200 jumped sharply yesterday but ran into resistance at 7800 today. Declining peaks on the Trend Index warn of secondary selling pressure and another test of support at the recent lows (orange line) is likely.

ASX 200

The 6-month chart shows the up-trend losing momentum. Breakout above 7900 is less likely but would offer a target of 8200.

ASX 200


The real cash rate (cash rate minus CPI) remains close to zero, reflecting easy monetary policy despite rate hikes in 2023.

Real Cash Rate

But declining credit growth warns that economic growth is slowing.

Credit & Broad Money Growth

Consumer sentiment is lower than in the 2008 financial crisis — the result of high inflation from negative real interest rates after the pandemic.

Consumer Sentiment


The 6-month chart of Financials shows the up-trend losing momentum, as with the ASX 200.

ASX 200 Financials

Net interest margins of the major banks remain under pressure.

Major Bank Net Interest Margins

Consumer Staples are in a down-trend after breaking primary support (red below). Trend Index peaks at zero warn of selling pressure.

ASX 200 Staples

A-REITs are still in an up-trend but declining Trend Index peaks warn of selling pressure.


Health Care threatened a primary down-trend after breaking support at 42K but has since recovered — a bullish sign.

ASX 200 Health Care

Consumer Discretionary is also losing momentum — similar to Financials.

ASX 200 Discretionary

Telecommunications are in a strong down-trend, with the Trend Index breaking below zero.

ASX 200 Telecommunications

Information Technology is outperforming, with accelerating trendlines and rising Trend Index troughs above zero.

ASX 200 Information Technology

Utilities is another bright star, displaying similar accelerating trendlines and rising Trend Index troughs above zero.

ASX 200 Utilities

Energy is testing primary support at 10K with a bearish Trend Index declining below zero.

ASX 200 Energy

The ASX 300 Metals & Mining index is attempting a recovery. Breakout above 6100 would be a bullish sign, while respect would warn of another test of primary support at 5600.

ASX 300 Metals & Mining

The All Ordinaries Gold index is in a strong up-trend. Respect of support at 7500 would signal another advance with a target of 8500. Breach of support, however, would signal another test of 7000.

All Ordinaries Gold Index


The ASX 200 is losing momentum. So are Financials, A-REITs and Consumer Discretionary.

Staples and Telecommunications are in a down-trend and likely to be joined by Energy.

Health Care and Metals & Mining show signs of recovery but further confirmation is needed.

The All Ordinaries Gold index is in a strong up-trend. Respect of support at 7500 would confirm another advance but breach of support, while less likely, would test 7000.


Dr Lacy Hunt: The impending recession

Not the best interviewer but you always get your money’s worth from Dr Lacy Hunt, former chief economist at the Dallas Fed.

The highlights:

  • Dr Hunt warns of a hard landing.
  • Recent GDP gains are led by consumer spending (+4%) but real disposable income declined (-1%). Personal saving depressed at 3.4%, compared to the GFC low of 2.4%.
  • UOM consumer sentiment is below level of previous recessions.
  • A sharp surge in the economy often occurs just before recession.
  • Dollar is too strong for global stability. It will fall as US goes into recession but then stabilize as the impact flows through to rest of the world.
  • Three signs of weakness:
    • Negative net national saving has never occurred before in a period where GDP is rising (economy is weaker than we think).
    • Bank credit is already contracting. This normally only occurs when the economy is already in recession.
    • Inflation is likewise falling before the recession.

Australia: Hard times

You don’t have to be an Einstein to figure out that 2023 is going to be a tough year. Australian consumers have already worked this out, with sentiment plunging to record lows.

Australia: Consumer Sentiment

The bellwether of the Australian economy is housing. Prices are tumbling, with annual growth now close to zero.

Australia: Housing

Iron ore, another strong indicator, rallied on news that China is easing COVID restrictions but prices are still trending lower.

Iron Ore

The Chinese economy faces a host of problems. A crumbling real estate sector, over-burdened with debt. Threat of a widespread pandemic as COVID restrictions are eased. Private sector growth collapsing as the hardline government reverts to a centrally planned economy. And a major trading partner, the US, intent on restricting China’s access to critical technology.


Rate hikes and inflation

The RBA hiked interest rates by another 25 basis points this week, lifting the cash rate to 3.1%. But the central bank is way behind the curve, with the real cash rate still deeply negative.

Australia: RBA Cash Rate

Monthly CPI eased to an annual rate of 6.9% in October, down from 7.3% in September, reflecting an easing of goods inflation.

Australia: CPI

But a rising Wages Index reflects underlying inflationary pressures that may force the RBA to contain with further rate hikes.

Australia: Wages Index

The lag from previous rate hikes is also likely to slow consumer spending. Borrowers on fixed rate mortgages face a steep rise in repayments when their existing fixed rate term expires and they are forced to rollover at far higher fixed or variable rates. A jump of at least 2.50% p.a. means a hike of more than A$1,000 per month in interest payments on a $500K mortgage.

Australia: Housing Interest Rates

GDP Growth

The largest contributor to GDP growth, consumption, is expected to contract.

Australia: GDP Contribution

Real GDP growth is already slowing, with growth falling to 0.6% in the third quarter — a 2.4% annualized rate. Contraction of consumption is likely to take real GDP growth negative.

Australia: GDP Contribution

Plunging business investment also warns of low real growth in the years ahead.

Australia: Business Investment

Record low unemployment seems to be the only positive.

Australia: Business Investment

But that is likely to drive wage rates and inflation higher, forcing the RBA into further rate hikes.


We may hope for a resurgence of the Chinese economy to boost exports and head off an Australian recession. But hope is not a strategy and China is unlikely to do us any favors.

We expect rising interest rates to cause a sharp contraction in the housing market, tipping Australia’s economy into a recession in 2023.


Charts were sourced from the RBA and ABS.
Ross Gittins: Hard times are coming for the Australian economy

The high cost of uncertainty

High levels of uncertainty in international trade, geopolitical outlook, and domestic politics in the USA are likely to have a domino effect on business and consumer confidence.

Business is likely to postpone or curtail new investment decisions. This is already evident in a down-turn in new capital formation, along with GDP growth, in the first half of the calendar year.

New Capital Formation

A similar picture is emerging in construction spending.


CEO confidence levels are way down.

CEO Confidence Levels

A slow-down in business investment in turn impacts on employment, causing a decline in payroll growth and average weekly hours worked.

Non-farm Payroll Growth and Weekly Hours Worked

Which in turn impacts on consumer sentiment as employees’ anticipation of future earnings declines.

Consumer Sentiment

The feedback loop will be completed if consumption falls. Retail sales dipped sharply in late 2018 but are keeping their head above water.

Retail Sales

And purchases of durables, like light motor vehicles, have leveled off but there is no significant decline so far.

Light Vehicle Sales (Units)

New housing starts and building permits even kicked up in August in response to lower interest rates.

Housing Starts

Consumers have, so far, continued spending but a down-turn in the stock market would weigh heavily on sentiment and consumption.

The S&P 500 broke its rising trendline, indicating a correction. Bearish divergence on Twiggs Money Flow warns of secondary selling pressure and a test of support at 2800. Breach of support is by no means certain but would offer a target of 2400.

S&P 500

We have reduced our equity exposure for International Growth to 34% of portfolio value because of our bearish outlook for the global economy.

ASX: Rate cuts not helping

From David Scutt at SMH:

A growing body of evidence suggests interest rate cuts from the Reserve Bank of Australia may be draining confidence in the economy rather than boosting it.

Key Purchasing Managers Index (PMI) figures released on Thursday showed a deterioration in Australian business conditions, impacted by what firms are describing as a general lack of confidence across the economy.

The Commonwealth Bank’s Australia “flash” Composite PMI produced in conjunction with IHS Markit, fell 2.6 points to 49.5 in August.

Commonwealth Bank Markit Flash PMI

The Composite PMI surveys firms from manufacturing and services sectors, accounting for around 75 per cent of the Australian economy. Activity levels have only declined three times since the survey started in May 2016, the last time in March this year.

“Households are taking the lower cash rate as a negative sign, raising concerns about what is happening with the economy that we need interest rates to go even lower,” said Kristina Clifton, senior economist at the Commonwealth Bank.

Ms Clifton cited the ongoing trade dispute between the United States and China, the RBA’s rate cuts, and the drought as factors hurting confidence. “Businesses are feeling this pessimism,” she said.

The decline in the PMI data echoes a similar slump in consumer confidence in the wake of the RBA’s July rate cut, which took the cash rate down to 1 per cent. “That lines up with what we’ve seen in [consumer confidence] where we saw quite a sharp drop following the June and July rate cuts” Ms Clifton said.

The Westpac-Melbourne Institute consumer sentiment survey fell to its the lowest level since August 2017 that month. Confidence subsequently recovered in August following the RBA’s decision to keep the cash rate steady.

Westpac Melbourne Institute Consumer Sentiment

Consumer sentiment is trending lower but there is also a recent series of higher troughs. Breakout from the triangle will indicate future direction.

On the downside, new vehicle sales for July 2019 fell for the 16th straight month.

Vehicle Sales

New vehicle sales are a leading indicator for the economy. Automotive Holding Group (AHG) is normally a useful bellwether for the overall ASX 200 index but its latest rally is distorted by a proposed merger with rival AP Eagers (APE).


The consumer outlook (below) is bearish, with family finances for the next 12 months down 6.5% (YoY) and the next 5 years down 5.3%. But one factor has definitely improved with the latest rate cuts: time to buy a dwelling (YoY) is up 16.7%.

Westpac Melbourne Institute Consumer Survey

Improving sentiment towards housing and rising auction clearance rates, albeit on low volumes, has helped banks, with ASX 200 Financials index finding support at 6000.

ASX 200 Financials

But UBS warn that further interest rate cuts would squeeze bank interest margins and may force them to cut dividends.

Australia: Bank Net Interest Margins

And a major threat is the potential cutback in business investment, because of the uncertain global outlook, and its impact on employment and consumer sentiment.

Australia: Business Investment

Iron ore is edging below support at $94/tonne, suggesting another decline to test support at $80/tonne.

Iron Ore

Materials are undergoing a strong correction. Declining Money Flow peaks warn of strong selling pressure. Breach of support at 12700 is likely and would warn of a test of primary support at 10700/11000.

ASX 200 Materials

On a more positive note, REITs are enjoying strong buying pressure, signaled by Money Flow troughs above zero, as the scramble for yield intensifies. Breakout above 1700 would signal another advance.


With a bearish outlook in its two largest sectors, the ASX 200 is likely to follow. A harami consolidation above support at 6350/6400 is bearish and breach would warn of a strong decline.

ASX 200

With the uncertain impact of a trade war on the Chinese economy, we reduced our exposure to Australian equities to 20% of portfolio value on 19 August 2019.

Westpac bulletin: Consumer sentiment falls

Westpac Melbourne Institute Index of Consumer Sentiment fell by 8.3% in December…….

Risk aversion increased markedly in this survey. When asked about “the wisest place for savings” 26.6% of respondents nominated “pay down debt”. That was an increase from 18.7% in September. Since we started measuring that component in 1997 there has only been one higher measure, in March 2010. Only 6.6% of respondents nominated equities – the lowest percentage since 1993; while the 14% nominating real estate was, apart from 2008, the lowest since the survey began in 1974.

Comment: ~ Equities at their lowest level since 1993 is a great contrarian indicator. There is still risk of further downside, so too early to invest at present, but this will be a good number to watch in 2012.