This week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 75 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 65 (Carriers)
The DHL Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.
Last week, the Passport Research team wrote that the week ahead would be a bellwether for the holiday season. We believed that if in the last week of October tender rejections took a leg up and we saw widespread rate pressure to the upside, we could expect a volatile peak season. This week, we saw OTRI make a considerable move up, and spot rates followed to a lesser degree.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels positive for carriers, momentum neutral
The volume picture remains rosy for most of the logistics industry. Recent economic data, while lagging, is remarkably positive: Consumer confidence continued to climb in October, durable goods demand exceeded expectations in September and consumer spending notched a 1.9% growth rate in September. Even data out of the manufacturing sector exceeded expectations this week — the ISM manufacturing index came in at 59.3%, the highest value in two years.
The Outbound Tender Volume Index has flatlined at an extremely elevated level since Labor Day. On an accepted tender basis, volumes are running up 24% year-over-year — no change from last week.
The one potentially major headwind forming is a brick-and-mortar spending decline in COVID hotspots. Whether this leads to a material decline in total consumption in these areas is to be foreseen. In either case, this is a trend both shippers and carriers need to be monitoring closely as we move into the teeth of the holiday season.
While consumption eventually shifted online and the freight markets benefited greatly from that move, it took some time. For weeks, freight volumes were flowing at national holiday-like levels. It’s unlikely we see any type of slowdown to that degree, but the threat must be noted.
In all, we feel there are the necessary ingredients to keep the spot market strong through year-end: relatively tight capacity, strong volumes and positive cyclicality. The low inventory-to-sales ratio, strong consumer sentiment and spending, lack of service-based spending options and acceleration of e-commerce growth all bolster our belief.
Tender rejections: Absolute levels and momentum positive for carriers
Last week, the Passport Research team wrote that the week ahead would be a bellwether for the holiday season. We believed if in the last week of October tender rejections took a leg up and we saw widespread rate pressure to the upside, we could expect a volatile peak season. This week, we saw OTRI make a considerable move up and spot rates followed to a lesser degree.
The Outbound Tender Reject Index (OTRI) notched another all-time high with Thursday’s data bringing the index to 27.26%. Not only is this a three-year series high, but it is trending higher. After a few weeks of decline off historically high levels, the West Coast markets began to tighten once again this week. On the heels of the last import surge prior to holiday shopping, rejection rates out of Los Angeles have turned back up this week.
This week, the Passport team cited the ATL-PHI and LAX-SEA lanes as evidence of a significant freight rally. Both are headed into unattractive backhaul markets, and the team has shown over the past few months that the first lanes to move in a rally are the lanes where carriers can most easily exercise optionality, where they have the most pricing power — in essence, on lanes going into markets where most carriers don’t want to go. Only much later will rates headed into attractive headhaul markets move upward, if they move at all. The point here is that if last week’s rate data and this week’s rejection data signal a significant rally in trucking markets for peak season, then the rate increases on lanes with backhaul destinations fit that pattern.
Spot rates: Absolute levels and momentum positive for carriers
The Truckstop.com national van spot rate per mile increased this week for the first time since mid-September. Spot rates have followed the path of tender rejections at a lag. The previous three weeks have felt like a breather of sorts before what is poised to be a raucous holiday season. The national average ticked up 2 cents to $2.85/mile, inclusive of fuel.
Of the 100 lanes available from Truckstop.com in SONAR, 55 were positive this week, up from only 41 positive last week.
The yearly comps are becoming increasingly more difficult. In typical years, there is significant spot rate inflation during the peak season as shippers seek to stock shelves ahead of holiday spending. This year has not been typical in any way. Spot rates have been up 20-25% year-over-year for months. However, we still should expect to see some seasonal upward pressure to spot rates in the coming weeks.
On a national level, rates are still up 21% year-over-year, down from 25% last week. Rates have been positive on a yearly basis since mid-June but have recently accelerated as carriers have been rejecting tenders at 20%-plus rates. Despite the yearly comps getting tougher soon, we expect to see spot rates running up double digits on a yearly basis.
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
Weekly jobless claims were released Thursday and give us one of the best close-to-real-time indicators of the overall economy.
Jobless claims fell sharply this week and came in well below consensus expectations. Jobless claims were 751,000 this week, which slightly missed the consensus of 741,000, and dropped down from 758,000 last week. The great news is that this week marked the lowest weekly jobless claim total going all the way back to March 14, when COVID-19 first began to spread in the U.S. and jobless claims exploded. More good news came in the form of continuing claims (a rough proxy for unemployment), which fell sharply again this week, down by 538,000 to 7.3 million. The unemployment rate has come down to 7.9% but is still more than double its pre-pandemic level, though this should fall when the October unemployment rate is released.
Initial jobless claims (weekly in 2020)
Source: CNBC, U.S. Department of Labor
Turning to consumer spending as measured by Bank of America weekly card (both debit and credit) spending data, total card spending in the latest week was up 2.2% year-over-year. The picture is even brighter when focusing on retail spending. Retail spending (excluding auto) was up 11% year-over-year last week.
As we usually note, keep in mind there is a beneficial mix shift from cash to debit ongoing that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 8% year-over-year and far outpacing credit card spending, which is down 4% year-over-year.
The main takeaways this week are that the virus is starting to impact brick and mortar retail spending negatively and restaurant and bar spending is slowing down. COVID daily cases are spiking again dramatically in the U.S. and the 50 counties with the highest concentration of new COVID cases are seeing brick and mortar retail sales declines, as opposed to growth in the rest of the country. As for slowing restaurant spending, the colder weather may be a factor there as outdoor dining is the primary option for many restaurants.
By category, online electronics (up 79% year-over-year this week) and online retail (up 64%) continue to be the standout performers. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker ones, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually.
Grocery is still strong but well off the highs, running up 11% year-over-year. Restaurant and bar spending has staged a huge comeback and is now down just 7% year-over-year; as discussed earlier this is starting to slip though and will be an important category to monitor going forward with COVID-19 cases skyrocketing globally. Brick-and-mortar retail spending has improved dramatically and was down 2% year-over-year this week. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but all of the former categories are way up off the bottom and appear to have gained momentum in recent weeks. Airlines and entertainment are now declining about 60-70% year-over-year compared to the trough of down 90%-100% in early April.
Card spending by American consumers has a strong correlation with truckload volumes, so we will continue to monitor this data closely going forward.
Source: Bank of America Merrill Lynch
Transportation stock indices: Absolute levels and momentum positive for carriers
It was a fantastic week for our transportation indexes following several strong months. LTL was the best performer this week at 9.4%, while logistics was the worst performer but was still up 4.2%.
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