This week’s DHL Supply Chain Pricing Power Index: 85 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 80 (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.
Both truckload tenders and tender rejections rose this week. If spot rates are to continue the succinct but lagging dance with tender rejections, we should see spot rates inflate over the next two weeks. Also, with Thanksgiving just a week away, drivers will be seeking freight that drives them toward home, which could push rejections and spot rates higher.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
The truckload market has been driven by the consumer in 2020. And while we still expect a strong holiday truckload and parcel market due to a resilient U.S. consumer, the latest retail spending data from the Commerce Department disappointed. Tuesday morning, the October retail sales number was published and showed an increase of .3% compared to economist expectations of .5% and a material decline from the 1.9% growth in September.
In order for us to alter our thesis, economic data will need to deteriorate across multiple data sets and for longer than one month. We also would like to point out that although retail sales disappointed, they did expand. One potential risk to consumer spending is a failure to pass another round of fiscal stimulus. There are signs that consumers are starting to run low on cash and if there isn’t aid passed, this will likely impact consumer spending.
Spot market volumes took a leg down this week, with more than two-thirds of the 100 lane pairings contracting. Contract volumes moved in opposition this week, up 2.16%.
We are now firmly in peak retail season, which means that overall truckload volumes are unlikely to fall off a cliff. The national trucking market will be supported by consumer holiday shopping even though some shippers — for instance those selling building materials — will enter a seasonally soft period. Additionally, there are more loaded ships (15) anchored off the West Coast awaiting port space now than at any time in the past five years, which will fuel further intermodal and truckload volumes.
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Our thesis is largely the same: 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
Tender rejections rose this week to another all-time high at 27.84%. We believe any moves up or down from this level are marginal and do not materially affect capacity. We also believe we are at or near the natural ceiling for the Outbound Tender Reject Index (OTRI).
Compared to previous years, rejection rates are exceptionally strong, more than 2,000 bps higher than 2019 levels and more than 1,200 bps higher than 2018 levels. Rejection rates slid in 2018 throughout October before grinding higher in November and December but ultimately exited the fourth quarter lower than they began the quarter. In 2019, rejection rates started climbing at a rapid rate starting Nov. 18, about 10 days before the Thanksgiving holiday, jumping ~300 bps in the last two weeks of the month. In 2020, we expect that rejection rates will stay strong through the rest of the year, though they shouldn’t climb at similar rates to the previous two years due to the already extraordinarily high levels.
The West Coast markets tightened this week after the past couple of weeks of slight declines in OTRI. The Passport Research team noted a small, tentative, weak but possibly telling bullish signal in the Los Angeles and Dallas markets this week.
Tender rejections in both LA and Dallas moved higher, together, over the past week. For much of the year, the markets traded capacity back and forth, with rejections rising in one market and falling in the other.
Now there simply aren’t enough trucks in either market to move the available freight. If Los Angeles and Dallas consume an increasing share of spot trucking capacity relative to other major markets, we could see rates across the country run up again.
At this stage in the cycle, we don’t think there will be incremental capacity added to the trucking industry that will materially affect the market in 2020. While a record number of motor carrier authorities are being granted by the FMCSA, it’s our view that these are primarily company fleet drivers who have chosen to go independent and leverage their earning power in a very hot market. The fact that enterprise carriers — from Schneider to Heartland Express and many more — are aggressively raising wages and sign-on bonuses for team and solo drivers tells us that the largest fleets are actually struggling to seat their trucks, much less grow their fleets.
Spot rates: Absolute levels and momentum positive for carriers
Carriers are still rejecting 27.84% of all truckloads tendered to them by shippers, indicating that the freight demand is outstripping capacity in many markets and that gradually rising contract rates have not been enough to improve routing guide compliance. Although spot rates declined this week, we believe spot rates will test the year-to-date highs in the coming weeks as shippers manage for transit time and service instead of cost and carriers are constrained by driver home time.
Of the 100 Truckstop.com spot rate lane pairings in SONAR, less than 40 were positive week-over-week.
If spot rates are to continue their succinct but lagging movement with tender rejections, we should see upward pressure on spot rates before Thanksgiving. Drivers will also be looking to get as close to home as possible and will select freight with turkey dinner on their minds.
On a national level, rates are still up 13% year-over-year, down from 17% last week and 21% the week prior. The comps continue to get more difficult over the next week; in 2019, spot rates surged 21% in three weeks before retreating after Thanksgiving.
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 tougher yearly comps, 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 rose modestly this week and came in above consensus expectations. Jobless claims were 742,000, which missed the consensus of 710,000, breaking a multi-week downtrend. The good news is that this week still marked the second-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 429,000 to 6.4 million. The unemployment rate fell to 6.9% in October from 7.9% in September.
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 5.8% year-over-year. The picture is even brighter when focusing on retail spending. Retail spending (excluding auto) was up 13.0% year-over-year last week.
As we usually note, keep in mind there is an ongoing beneficial mix shift from cash to debit that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 11% year-over-year and far outpacing credit card spending, which was down 0.4%. Interestingly, though, this is just the second week in the past eight months since COVID-19 spread that we can recall credit card spending being flat or positive. In other words, after being down precipitously, credit card spending appears to have finally turned the corner.
The main takeaways this week are the massive increase in online electronics spend (to up 124% year-over-year), likely driven by the new iPhone launch and also serving as a meaningful boost to credit card purchases. Secondly, spending in COVID hot spots (as defined by the top 100 counties in the U.S. by new case concentration) continues to serve as a canary in the coal mine, with hot-spot brick-and-mortar retail spending of -7.8% compared to -1.0% for the rest of the U.S. Interestingly, online spending in COVID hot spots compared to non-hot spots is very similar, which surprises us as we would have guessed it were higher in areas where consumers are on lockdown.
By category, online electronics (up 124% year-over-year this week) and online retail (up 66%) 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 and accelerating again, running up 15% year-over-year. This is a significant increase from recent weeks and months, which raises eyebrows as COVID cases reaccelerate. Restaurant and bar spending has staged a huge comeback and is now down just 7% year-over-year; as discussed earlier, however, this is starting to slip 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 1% year-over-year this week. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but all three 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 an excellent week for our transportation indexes following several strong months, though many transportation stocks are well off their highs. Truckload was the best performer this week at 3%, while LTL and logistics were the worst performers at 1.7%.
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