This Week’s DHL Supply Chain/FreightWaves Pricing Power Index: 25 (Shippers)
Last Week’s DHL Supply Chain/FreightWaves Pricing Power Index: 25 (Shippers)
Three-Month DHL Supply Chain/FreightWaves Pricing Power Index Outlook: 45 (Shippers)
The trucking industry operates in a market based on real-time demand and supply. When demand is higher than capacity, carriers gain negotiating power for rates. When supply is higher than demand, shippers gain negotiating power for rates.
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 9,821.85. While load volumes have remained above 2018 levels since mid-July, over the past couple of weeks the year-over-year change has weakened significantly from 7% to 1.47%. Week-over-week load volumes are down 10 basis points (bps). While it is too early to call a trend, deteriorating economic indicators combined with weakness in OTVI.USA is worrisome.
Tender Rejections: Trend and Absolute Levels Positive for Shippers, Long-Term Trend Positive for Carriers.
Outbound Tender Rejections (OTRI.USA) rose 38 bps this week from 4.80% to 5.18%. This was the first increase in tender rejections in several weeks, a positive for carriers. However, capacity continues to be loose without any clear indicators to build a narrative for capacity to tighten or line-haul rates to bounce.
Spot Rates: Absolute Level and Momentum Positive for Shippers
Spot rates continue to slide as we head deeper into October. The DAT dry van national average climbed 2.4% this week to $1.42 per mile. We still think this range is the trough for spot market rates as it is reflective of normal per mile operating costs for carriers. With this said, it can still remain at this lower band for the coming months based on capacity metrics from OTRI.USA and weakening demand indicators from the economy.
Clawing Back “Paper” Rates: Momentum and Trend Positive for Shippers
The majority of truckload companies that have reported third-quarter earnings so far have cited a very competitive and aggressive environment in terms of an early read on the upcoming bid season for contract freight. We believe this will be a common theme moving forward, suggesting shippers will be aggressively clawing back 2018 increases in paper rates during this bid season. It also calls into question some of the more aggressive estimates we have seen looking for low-single-digit positive paper rates for the overall truckload industry in 2020.
Critical Events: Positive Short-Term Momentum for Carriers.
Results of the ratification vote by members of the United Auto Works (UAW) union to end its strike against General Motors (GM) is scheduled to be announced on Friday October 25. It is expected to be approved by a narrow majority of UAW members.
If approved, it will pave the way for 48,000 GM workers to return to assembly lines across the country.
The strike is nearing its 40-day mark, which means there is nearly six weeks of backlog in the GM supply chain. Freight rates in Michigan, Indiana, Ohio and South Texas should see a short-term pop as GM and its vendors rush to get raw materials and finished parts to the proper locations to restart production.
Economic Stats: Positive Momentum for Shippers.
Economic news was relatively quiet this week in terms of major releases that materially impact the economy. Durable goods orders slowed 1.1% in September, the biggest decline since May’s -2.3%. In general, shrinking durable goods orders are a negative for carriers and a positive for shippers.
On the positive side for carriers, weekly unemployment claims dropped 6,000 week-over-week to 212,000, beating expectations and suggesting the labor market remains tight. The four-week moving average of weekly unemployment claims, considered a superior measure due to the underlying volatility of the dataset, also dropped by 750 to 215,000 last week, confirming the improvement in weekly claims. This has positive implications for continued strength in consumer spending.
Lastly, existing home sales fell 2.2% in September from the previous month to a seasonally adjusted annual rate (SAAR) of 5.38 million, missing consensus expectations of 5.45 million. This reverses from a gain in the prior two months. Rising median home prices (up 5.9% year-over-year) and low inventories (the supply of homes for sale fell 2.7% year-over-year) are weighing on existing home sales. Falling existing home sales are a positive for shippers.
With two out of the three economic indicators released this week favoring shippers, the absolute level and trend for economic data remains on their side.
Third Quarter Transportation Earnings Highlights: Absolute levels positive for Shippers, momentum positive for Carriers
The market is sanguine on the transportation sector, even in the face of widespread disappointing earnings as demonstrated by the fact that the proprietary FreightWaves Truckload Index was up another 2% this week. We think the fact that the weakness has been well telegraphed and investors speculating that the worst may be behind us are ruling the day.
Covenant Transportation (CVTI) reported earnings below expectations but the stock has risen 1% this week, continuing the trend of truckload stocks rising on poor earnings reports that we saw last week as investors anticipate a trough for truckload earnings in 2020.
On the LTL side, Old Dominion Freight Lines (ODFL) saw a rare earnings miss and its revenue declined year-over-year in the third quarter for the first time in three years. However, its stock has climbed 5% this week.
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