Mounting pressures on paper and spot rates cloud the recovery picture

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 10,006.64. 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 1.81%. National volumes had a solid rally up 2.64% over the past seven days, but are still 100 basis points (bps) below the 60-day moving average. Multiple third quarter earnings reports have been released this week voicing little optimism for the remainder of the year. HubGroup in particular made mention of no expectations for a peak season uptick in volume demand. The closer we get to Christmas without a surge in volumes, the more likely it is the market has a lukewarm holiday season. 

SONAR: OTVI.USA

Tender Rejections: Trend and Absolute Levels Positive for Shippers, Long-Term Trend Positive for Carriers

Outbound Tender Rejections (OTRI.USA) rose 20 bps this week from 5.18% to 5.38%. This was the second 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. 

SONAR: OTRI.USA

SONAR: OTVI.USA (Tendered Loads in Blue), OTRI.USA (Tender Rejections in Orange)

Spot Rates: Absolute Level and Momentum Positive for Shippers 

Spot rates continue to slide as we head into November. The normal holiday seasonal rally in spot rates and volumes has proven elusive thus far. The DAT dry van national average fell 3.5% this week to $1.37 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.  

Contract Rates: Absolute Level and Momentum Positive for Shippers

According to a major freight broker in their third quarter earnings report, they are seeing severe downward pressure on contract renegotiations for 2020 running in the negative 12% range year-over-year. We believe this broker is big enough to represent the overall brokerage industry and think other brokers will face this same issue and need to aggressively compete. This contrasts sharply with Wall Street, where most analysts are modeling contractual rates to be flat to slightly up or down in 2020. If this is a directionally accurate indicator for the overall trucking market, we believe there needs to be a reset downward in expectations.

Critical Events: Positive Short-Term Momentum for Carriers

There are now more than 15 wildfires ravaging multiple areas of California, some of which have been blazing for more than two weeks.

The largest is the Kincade Fire just north of San Francisco. Five days after it started, the Kincade Fire surged through Sonoma County in the early morning of October 28, burning new homes and other structures as it moved southward towards the edge of Santa Rosa. Wind gusts of nearly 100 mph have expanded the fire to three to four times its original size since Sunday, prompting electricity providers to shut down the power grid multiple times in hopes of avoiding more fires starting.

The Kincade Fire has now taken more than 66,000 acres – about one-third the size of New York City. California has closed portions of US-101 and have prompted the Federal Motor Carrier Safety Administration to suspend certain regulations for truck drivers, including hours of service.

Another notable fire is threatening California’s most populous city, Los Angeles. The Getty Fire is the most recent to start and has already burned more than 500 acres west of Los Angeles. Future roadblocks are possible near any of the wildfires in California, leading to potential short-term delays in trucking freight through what is perhaps the busiest market in the country. Ontario, California has the largest market share of any of the 135 markets in SONAR. 

Economic Stats: Positive Momentum for Shippers

The Federal Reserve cut interest rates (SONAR: FEDFUND.USA) yesterday by 25 bps to a targeted range of 1.5-1.75%. This was in-line with market expectations. However, the Fed signaled it may pause from here, giving credence to the camp that believes the latest rounds of rate cuts are simply “a mid-cycle adjustment” and not the start of a prolonged easing cycle as previously suggested by Fed Funds Futures. The Fed Funds target rate is the rate that banks charge each other for overnight lending but it has much broader economic implications for the cost of other forms of consumer and corporate debt.

When dovish Fed policy via rate cuts is effective, it generally produces positive effects in the economy at a two- to three-quarter lag. In the case of the freight markets, lower interest rates could feed into lower consumer borrowing costs and hence increased demand for housing, autos and revolving consumer credit. Lower interest rates can also lead to lower borrowing costs and easier access to credit for corporations, which could feed into increased capital investment and hiring. If effective, lower interest rate policy would have positive effects on dry van (OTVI.USA), reefer (ROTVI.USA) and flatbed outbound tender volumes (FOTVI.USA) because of increased demand for everything from housing to food and beverages, consumer durables and capital equipment in 2020.

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. We think the market may have gotten a little ahead of itself in its optimism the last few weeks though in terms of the double digit returns to our transportation indexes as this week our proprietary truckload index took a step back and was down 2.3%. Our LTL Index was down 2.6% and our Logistics Index was down 6.9% this week.

There have been exceptions, however, to the market being willing to look through poor results. C.H. Robinson (STOCK XCHG/CHRW) fell double-digits in trading yesterday on a top and bottom line miss combined with a weak outlook. Ryder (STOCK XCHG/R) dropped 12% this week on an earnings miss. So did Saia (STOCK XCHG/SAIA), which posted strong revenue but its stock fell 10% this week due to higher expenses and was primarily responsible for our LTL Index dropping 3% this week.

The market has been most punitive on the FreightWaves 3PL/Logistics proprietary Index, which was down 7% this week on a host of disappointing earnings reports from C.H. Robinson, Echo Logistics (STOCK XCHG/ECHO) and Hub Group (STOCK XCHG/HUBG).

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at [email protected], Seth Holm at [email protected], or Andrew Cox at [email protected].