Carriers clawing back: power shifts towards the carriers for a second consecutive week

The DHL Supply Chain/FreightWaves Pricing Power Index uses the analytics and data contained in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers. 

The Pricing Power Index is based on the following indicators:

Load Volumes: Momentum and Trend Neutral

The Outbound Tender Volume Index (OTVI.USA) is currently at 7,394.28, down significantly due to the Thanksgiving holiday. Our volume index is a seven-day moving average, thus the volume total currently is well below normal totals. Also, because the holiday landed on the last possible day (the 28th), yearly comparables are rendered insightless. With that said, it is important to compare the pre-holiday peak change from last year to this. This pre-turkey day peak in volume was 3% higher than 2018, and it preliminarily seems the post-holiday trough is about 3% less shallow than last year. This is positive in light on the holiday demand picture, but it is difficult to determine how much of this is due to strong holiday demand or simply because there is less time between Thanksgiving and Christmas. 

SONAR: OTVI.USA

Tender Rejections: Absolute Levels Positive for Shippers; Short-term and Long-term Trends Positive for Carriers

Outbound tender rejections are still above the 7% mark, currently sitting at 7.38%. OTRI is also a seven-day moving average, meaning tomorrow will be the day when the post-Thanksgiving capacity picture becomes visible. Yearly comparables are still spectacular – the 2018 rejection levels never fell below double-digits. OTRI has been above the 6% resistance band since mid-October. It is typical for rejections to fall quickly after a national holiday, so we will glean more insights in the next few days into the capacity picture heading into the end of the year. 

SONAR: MAPS

Spot Rates: Absolute Level Positive for Shippers and Momentum Positive for Carriers 

Spot rates came to life during the holiday week, climbing almost 8% to $1.52 per mile according to the DAT dry van national average. We will continue to keep a close eye on spot rates going forward. Signs of a strengthening spot market will be if spot rates can continue this momentum into the holiday season, or at least set a higher trough above $1.43 per mile going forward. 

November Class 8 Truck Orders: Absolute Level and Momentum Positive for Carriers

November preliminary Class 8 truck orders (ORDERS.CL8) came in at 17,500, down 38% y/y and down 20% from 21,864 sequentially in October. October is seasonally a strong month for new truck orders so it is natural to see a dip in November. Orders have now been negative on a y/y basis for 13 straight months.

Class 8 truck orders running well below replacement demand is bullish for both future spot rates (DATVF.VNU) and outbound tender rejections (OTRI.USA). This is likely sometime in the back half of 2020 as the annualized shortfall of new truck orders is now equivalent to about 4% of capacity coming out of the market. Given a six- to nine-month lead time for new truck orders, it takes some time for orders running below replacement demand to feed into an increasing supply and demand imbalance (in favor of demand).

Economic Stats: Positive Momentum for Shippers

On Monday, the ISM Manufacturing PMI (ISM.PMI) survey results were released. The ISM came in at 48.1, which missed consensus expectations of 49.4. It also fell sequentially from 48.3 in October and is hitting new lows after peaking at about 60 in the summer of 2018.

A weak ISM combined with weak new truck orders is sending mixed signals and suggest the current economic backdrop remains rather tepid. In addition to spot rates, monthly net new truck orders (ORDERS.CL8) tend to correlate extremely well with the ISM manufacturing PMI (ISM.PMI) historically, as can be seen in the chart below. 

While most might say that because manufacturing is now only about 15% of the U.S. economy, economic growth is now primarily driven by consumer spending and services. However, manufacturing is much more important to trucking and accounts for a greater percentage of demand.

The ISM continues to be weak and deteriorate, which throws cold water on the notion of an imminent economic bottoming and acceleration into 2020. A weak ISM is also a negative for volumes, rates, jobs and capital expenditures, particularly in areas like flatbed (FOTVI.USA), open deck and specialized trucking, which are more manufacturing-driven.

SONAR: ORDERS.CL8, ISM.PMI

Transportation Stock Indices: Absolute Levels Positive for Shippers, Momentum Positive for Carriers

The market was previously sanguine on the transportation sector, even in the face of widespread disappointing third-quarter earnings, but that view appears to have taken a meaningful step back this week due to a souring of the trade war rhetoric and a weak ISM.

It was an ugly week for our proprietary truckload, less-than-truckload (LTL), logistics and parcel stock indices as they fell by 3.4%, 6.7%, 2.5% and 2.8%, respectively. Transportation equities dramatically underperformed the S&P 500, which fell by 1.3% this week. The ISM appears to be shaking investors’ faith in the likelihood of a global synchronized recovery in 2020 led by more economically sensitive and cyclical industries like trucking. 

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@www.freightwaves.com, Seth Holm at sholm@www.freightwaves.com or Andrew Cox at acox@www.freightwaves.com.