Australian households played a classic spread trade in December

Aussies were seemingly focussed on feeling good over being good in December, with a 29.4% m/m rise in alcoholic beverages and tobacco spending compared with -11.6% on heath. It’s a classic Christmas spread trade.

But overall household spending is slowing, rising only 2.2% m/m compared with 7% in November - likely due to big purchases over Black Friday Sales and Cyber Monday (for comparison, retail sales were down -3.9% in December). Furthermore, the annual rate of overall spending is now 11.2% y/y, down from a peak of 29.2% in August. Yet whilst spending is clearly slowing, it’s not yet at the level to force the RBA to take their foot off of the tightening peddle.

But a month or two of negative spending with a slight deterioration of the employment situation could change that and take us closer to the famous pause we were teased with in Q4. Also note that the Westpac-Melbourne Institute consumer survey flagged a 10.6% rise in unemployment expectations, and ‘attitudes towards major household purchases’ fell to its fourth low in 48-years. So consumers are showing signs of concern, but with inflation at such high levels and spending still positive, the RBA have little choice but to hike a couple more times in my view. And that likely makes March and May live meetings with 25bp hikes, with the potential for a 15bp hike to take rates to a round 4%.

ASX 200 daily chart:

The ASX has had a great start to the year, and it comes is no major surprise to see it pull back below the record highs and 7600 handle. And technical aside, sentiment has been dented by hawkish central bank talks and a hawkish 25bp RBA hike.

This has helped push the ASX 200 to a 3-week low and notch its first 3-day losing streak of the year. However, volatility for yesterday’s candle was low, the RSI (2) hit oversold yesterday and today the index is on track for a bullish close – which suggest an interim swing low may have formed. We also have US inflation data tonight which, if softer than forecast, could also boost sentient for the stock market. Therefore, my base case now is for a slight rise on the index before it breaks to a fresh cycle low, with key support zones residing around 7380 and 7300.