This week’s DHL Supply Chain Pricing Power Index: 65 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 55 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 60 (Carriers)
The DHL Supply Chain 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 carriers are now in the strongest pricing power position in the 10-month history of the index. Carriers are rejecting loads at an extremely high rate and volumes are still highly elevated. Spot rates have pushed higher and are now higher than at any point in the past two years for most Truckstop.com lane pairings in SONAR. DAT rate data also shows the highest rates since 2018. The only question now is, how long can it last?
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
As expected, freight volumes have roared out of the Independence Day disruption and currently sit at 12,431. While volumes have declined slightly since the beginning of the week, the outbound tender volume index (OTVI) remains up nearly 20% year-over-year. July 2019 exhibited typical freight seasonality, so yearly comps are relatively easy. 2018 was a banner year for freight volumes and yet, currently freight volumes are more than 16% higher than 2018. It is van volumes that have brought the index down slightly over the course of the past week. Reefer volumes continue to climb higher out of the holiday.
There is little evidence that leads us to believe freight volumes will fall off significantly in the coming weeks. The threat of lockdowns created a panic-buying situation in March, then freight volumes plummeted because the majority of businesses were closed. Now, regions are going back into lockdown but the restrictions are less severe. The sectors being locked down are predominantly service-based industries that do not move a large percentage of the nation’s freight. Consumer demand remains fairly strong given that the economic backdrop and manufacturing data from the Empire State Index and the Philly Fed Index show manufacturing is slowly returning to growth. For these reasons, we do not believe the typical seasonal decline will be as pronounced this year. Carriers are in a great position currently.
Tender rejections: Absolute levels and momentum positive for carriers
The Outbound Tender Reject Index (OTRI) is exhibiting stickiness at a high level. OTRI climbed even higher this week than the week leading up to the Fourth. We have heard from large asset-based carriers that they are rejecting more freight than they have in a very long time. OTRI currently sits at 16.72% and is trending upward.
The supply-demand dynamic of May, June and July has been much different than March and April. During March we saw volumes and rejections rise in stepwise fashion to all-time highs in a matter of weeks. This time around it has taken much longer for freight volumes to fill markets, and it has taken even longer for carriers to gain the confidence to reject contracted loads in favor of spot market options.
Another difference in this tightening environment is that volumes will remain elevated for some time, unlike in April when volumes plummeted to holiday levels due to nationwide lockdowns. We should expect to see tender rejections in the double-digit range as long as volumes remain elevated — all signs point to this happening. From a capacity standpoint, carriers are in the best position of 2020 right now. Carriers are rejecting loads at a higher clip than at any point since the summer of 2018.
Spot rates: Absolute levels neutral, momentum positive for carriers
Spot rates have climbed to the highest level in 2020 on a national level, according to DAT long haul freight rate data.
Volumes are flooding the spot market in almost every single Truckstop.com lane pairing available in SONAR.
The data from Truckstop.com is more timely than that of DAT, so there are disparities worth noting. The Truckstop.com data is also a seven-day moving average, so the data is comparing rates to the week of the Fourth. This makes weekly comps difficult for Truckstop.com spot rate data. For example, the lane with the largest weekly decline in rates (ATL to LOU, down 14% w/w) still has rates higher than at any point in 2019.
Rates are elevated right now and the supply-demand dynamic suggests they will remain so for some time. Carriers are rejecting loads at a high rate and volumes are flowing at historic levels. Carriers have options and they are exercising them in search of margins.
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
By far the most widely watched economic data point this week was initial jobless claims, which give us one of the best close-to-real-time indicators of the overall economy.
This week’s jobs news was slightly disappointing relative to the improved momentum and change in tone we had seen in the past two weeks compared to the four months since COVID-19 began to lead to massive layoffs. Initial jobless claims came in at 1.3 million last week, which came in worse than consensus expectations of 1.25 million but fell 100,000 from a week earlier and marked the 15th straight week of jobless claim declines. The jobless claim trends developing in hot spot states like California, Texas, Georgia, Arizona, Nevada and Florida are not good and bear watching. Lastly, there was also positive news on continuing claims, which dropped 422,000 from the previous week and are at 17.3 million.
U.S. initial jobless claims/gains (2007-present)
Source: CNBC, U.S. Department of Labor
Unfortunately, the Bank of America spending data for the past week has not yet been released. We will be back next week with an update on that front. Bank of America did release a slide in its earnings report Thursday morning that shows the pattern of consumer card spending year-to-date, and as one can see (and as we have discussed), consumer spending is well off the ~40% declines from late March and early April. However, spending has sort of flatlined at about down 5% overall for total consumer card spending, which is not bad considering the depth of the recession we are in (although keep in mind there is a beneficial mix shift from cash to debit ongoing that is somewhat inflating these numbers). 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
Lastly, on Thursday the retail sales report for June was released. The takeaway is that it was a strong report with retail sales in the U.S. matching pre-COVID levels and actually growing 1% year-over-year (and up 7.5% sequentially from May). Caution is warranted, however, because it is unclear if July or August will be as strong due to a resurgence of COVID in the Sun Belt, partial shutdowns increasingly taking hold in huge population centers like California, and the expiration of unemployment benefits at the end of the month. Nonetheless, economists are forecasting consumer spending to jump 23.5% in the third quarter (from an estimated down 32.5% in the second quarter).
Transportation stock indices: Absolute levels and momentum positive for carriers
It was a great week for our transportation indices following several strong weeks over the past month. Parcels was the best performer at 3.7% and LTL was the worst at 2.0%.
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