Asian policymakers, executives and investors spent much of 2018 scrambling to stay ahead of the curve. But what if, all along, they had their sights on the wrong one?

The bend on which most are focused is the US-versus-China trade war. And what a spectacle it has been, as US President Donald Trump launched a tariff arms race with no end in sight. The road ahead has been muddied further by his Twitter boasts about a “deal” with Xi Jinping that China’s president doesn’t recall making. This confusion has sent stock bourses reeling.

The real clues, though, are coming from the bond markets. This week saw US interest rates on three-year Treasury notes top those of five-year securities. The last time this so-called inversion of the yield curve occurred was in 2007, just before the onset of a recession in the world’s biggest economy.

The dynamic that really matters, though, will be two-year rates marching above 10-year ones. And current market dynamics suggest traders are very much nudging assets in this direction.

Storm ahead?

That could make for a rough 2019. A two-10 rate inversion has front-run every American downturn since the 1970s. And, really, the current expansion that began in 2009 is approaching Year 10 – old age in business-cycle terms.

General Motors was only the most visible of recent job cutters. Its closure of five auto plants was part of 53,000 layoffs around the US – amid expectations other large companies will follow. Weekly US jobless claims are now at a five-month high. That, say consultancies that track employment trends, suggests a downturn may be unfolding.

“Announcements like GM’s will not be the last, as companies adapt to shifting consumer behavior,” said Andrew Challenger of Challenger Gray & Christmas. “We’ve already seen major plans in the US from Verizon, Wells Fargo and Toys ‘R’ Us for exactly those reasons.”

Trump’s trade war deserves some blame. As global demand slumps from China to Japan, the effects of tariffs on steel, aluminum, US$250 billion worth of Chinese goods and threats of more to come are boomeranging back America’s way. The chill in global business sentiment is crimping investment everywhere. Tighter US monetary policy isn’t helping.

Japan’s economy contracted an annualized 1.2% in the third quarter. Business surveys suggest growing pessimism for 2019, auguring poorly for wage gains and a 2% inflation target.

China also is losing altitude. Exports, fixed-asset investments and purchasing managers’ orders all point toward markedly slower growth, whether or not Beijing allows that downshift to show up in official data.

China, of course, had been trying to diversify growth engines well before Trump launched his protectionist jihad. Hence the findings of a new Institute for International Economics report that “activity in China is cooling more than GDP suggests, but exports are not the main driver of the slowdown.”

Risk, risk, risk

The risk is that Trump prompts Xi to turn away from retooling efforts. Already, we’ve seen a return to the bubble-factory strategy that fueled a post-2008 credit boom totaling tens of trillions of dollars. Recent weeks saw Beijing gin up new infrastructure projects, business loans and tax cuts. Only time will tell how much China Inc reverts to the policies that shackled it with mountains of debt and overcapacity.

The Group of Two is another risk. The feedback effects between the world’s two economic giants are working at cross-purposes. Less confidence means less consumption and investment all around.

A currency tug of war is an omnipresent risk, as both Trump and Xi seek more competitive exchange rates. And then there’s Beijing’s $1.2 trillion of US Treasury holdings. Might China sell large blocks to remind Trump not to cross his banker?  Some of those holdings are now trading in ways that augur poorly for the US – and perhaps global – growth.

Still: It’s not a given that yield trajectories portend a recession. Because the curve between two- and 10-year Treasury debt hasn’t flipped, “no such recession flag has yet been hoisted by the bond market,” said analyst Will Denyer of Gavekal Research.

Yet if the curve continues moving in this direction, Asian markets are in for a stormy 2019.