Last Week’s Pricing Power Index: 40 (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.
FreightWaves’ Pricing Power Index uses the analytics and data contained in 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 Positive for Carriers.
The Outbound Tender Volume Index (OTVI.USA) is currently at 10,459.52, which is 2.54 percent higher than this time last year. On a week-over-week basis, OTVI.USA is down 0.88 percent. OTVI.USA has been trending upwards since mid-July, when the index first crossed above strong 2018 levels. However, there are significant headwinds, such as the United Auto Workers strike against General Motors, which continued into its second week. Outbound volume is down nearly 40 percent since last Monday in the Detroit market where the strike is most heavily concentrated. The strike is having a material impact on the entire state of Michigan – the state-level volume index (OTVI.MI) is tracking down 23 percent since the strike began and nearly 5 percent year-over-year.
Tender Rejections: Trend and Absolute Levels Positive for Shippers, Momentum Positive for Carriers.
OTRI.USA is currently at 5.26 percent, which is down from 5.92 percent last week and up 39 percent off the 3.78 percent trough experienced in mid-August. While OTRI.USA took a meaningful step back last week, the uptrend that started last month is still in place. Despite the uptick over the past month, outbound tender rejections are at a very low level historically on an absolute basis.
Year-over-year comparables are difficult because OTRI.USA did not fall below double-digits in 2018. Excess capacity beginning to exit the market and the upcoming holiday retail season should support continued firming of rejection rates.
Carrier Expectations Survey: Momentum Positive for Carriers.
The preliminary results of the FreightWaves Carrier Expectations Survey indicates a sharp increase in carrier optimism for load volumes and linehaul rates over the next six months. Carrier optimism for load volumes registered a paltry 30 percent in June/July of 2019, compared to the present, where over 50 percent of carriers state that they are optimistic about volumes and rates.
Paper Rates: Short-Term Positive for Shippers, Momentum Positive for Carriers.
The August Producer Price Index for Long Haul Trucking is now out and it shows paper (contract) rates have finally posted the first year-over-year negative numbers for the first time since early 2016. While this is positive for shippers in the short-term, it most likely favors carriers in the medium-term as this is a signal that the industry is moving through the repricing cycle and is in the later stages of marking rates to market.
Spot Rates: Short-Term Positive for Shippers, Momentum Positive for Carriers.
Spot rates remain at or near their natural floor, which is the operating cost per mile for an average carrier. In the short-term this is advantageous for shippers as low spot rates allow for an aggressive repricing down of current paper rates with carriers. This action is one of the primary reasons the August Producers Price Index for Long-Haul Trucking Index printed its first negative year-over-year number. For the medium-term, it is positive for carriers as the low point in this freight cycle has most likely been reached. Over the coming months the spread between paper and contract rates should narrow. This involves paper rates declining as shippers move contract freight into the spot market where rates should rise to reflect increasing demand.
Diesel Prices: Short-Term Positive for Both Shippers and Carriers.
Saudia Arabia is still on the radar this week. Production at the world’s largest oil refinery is still not online as of yet. Diesel prices at the pump nationally are roughly $0.09 above where it was before the attacks. While oil and diesel markets are relatively stable this week, any further shocks to world supply could lead to double digit increases in oil prices.
Economic Policy: Positive Momentum for Carriers.
Current economic policy is still “dovish” (i.e. stimulative) and favors carriers.
Economic data was relatively quiet this past week other than IHS Markit said its September U.S. PMI Index came in at 51, up from a three-year low of 50.7 in August. This index sits just above the 50 level that represents the line in the sand between growth and contraction. Readings for this index in Europe (and particularly Germany) were much grimmer and deeply recessionary, but for now the weakness has not spread across the Atlantic Ocean.
In the midst of a slowdown in global growth, nearly all developed world central banks are in aggressive easing mode and some have even restarted quantitative easing. When interest rate policy is effective, it generally boosts the economy with a two- to three-quarter lag and, in the meantime, we think a strong consumer in the U.S. is enough to support rates into the holiday season.
Furthermore, trade tensions have continued to ease between the U.S. and China, favoring carriers on the margin should the status quo prevail. However, trade war noise has been eerily calm prior to the two sides’ upcoming meeting in Washington and has taken a back seat to the news of the potential for President Trump to be impeached. One positive sign has emerged, though, with the Chinese upping their soybean purchases in recent weeks.
Economic Stats: Positive Momentum for Carriers.
Deutsche Bank transportation analysts put out a note this week titled “Bullish on 2020.” Wall Street is broadly coming around to the view that FreightWaves has espoused since July that the freight markets are in a nascent recovery stage that should begin to be noticeable by mid-2020 at the latest in terms of improving financials. Deutsche Bank cited three factors for their improving outlook. First, the Cass Freight Shipments Index has now been negative for nine months compared to a freight recession average of 18 months, implying a recovery for transportation companies in mid-2020. Second, the DHL Global Trade Barometer has turned negative for the first time in several years and there tends to be a sharp and fast rebound historically when this happens. Lastly, global industrial production leading indicators such as PMIs are stabilizing, bottoming out and beginning to turn up from a very depressed level. For context, in July 90 percent of the world’s PMIs were negative. This figure now stands at 16 percent.
New truck orders are also running well below replacement demand. Class 8 new truck orders are running at an annualized pace of 150,000 in 2019. This is below replacement demand levels in the 250,000 to 300,000 range. This implies that more than 5 percent of capacity is leaving the market at a time when outbound tender volumes are running up low-single-digits year-over-year for two straight months now and comparisons will only continue to ease from here. We believe this sets up the trucking market for an attractive 2020.
Ten-year bond yields currently sit at 1.69 percent, compared to 1.80 percent last week. However, this is well off the three-year low seen in early September of 1.45 percent as markets digested the worst of the trade war news and global economic data continued to weaken. Bond yields are the markets’ best indication of the outlook for future growth and inflation. The sharp move up in yields over the past month suggest the financial markets are anticipating a bottoming of economic growth and inflation, as well as incorporating a brighter outlook for cyclical industries like trucking that perform better in a strengthening economy.
Three-Month Pricing Power Index Outlook: 55 (Carriers)
The full Pricing Power Index Report is live on FreightWaves SONAR in the Market Insight and Research tab.
For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at email@example.com, Seth Holm at firstname.lastname@example.org, or Andrew Cox at email@example.com.