This week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 85 (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.
After a lull over the past couple weeks, the major indices we track all improved in favor of the carriers this week, but only marginally. Both total tenders and accepted tenders increased this week after slipping last week. The story is similar for both tender rejections and Truckstop.com spot rates.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
After declining slightly last week, the Outbound Tender Volume Index (OTVI) bounced back this week. Last week’s decline was marginal, only -1.3%, but it was the first weekly decline since the freight market began heating up in May. There is still an extremely high number of rejected tenders being counted in OTVI. To account for this, we can calculate the accepted tender volume index (using the inverse of OTRI). This metric fell more than 3% last week but has also bounced back up 1.5% week-over-week.
15,692 * (1 – .256) = 11,675 accepted tender volume index value for Oct. 1, 2020
10,553 * (1 – .052) = 10,004 accepted tender volume index value for Oct. 1, 2019
Using this metric to control for the high level of rejected tenders allows us to get a more accurate understanding of the true demand level. That level has little changed over the past six weeks. Demand remains extraordinarily high and is simply outpacing capacity.
In last week’s weekly trucking update from the Passport Research team, “The flattening,” the team referenced the carrier-facing headcount expansion at brokerages and the wage inflation at carriers as evidence this rally has legs.
Accepted freight tender volumes are running up 16.5% year-over-year despite the minor slump last week. October should give us a strong indication of demand through the end of year. Our expectations have not changed in recent weeks, and we still believe the rest of the year is bright for the freight market. Retail inventories are down 12% year-over-year, while sales are up 11%. The possibility of another round of stimulus before the election would aid this argument. While consumer confidence has faltered, spending is remaining strong given the economic backdrop. These factors lead us to believe that freight volumes could end with a massive bang.
Tender rejections: Absolute levels and momentum positive for carriers
National truckload capacity continues to remain tight as the Outbound Tender Reject Index (OTRI), a measure of relative capacity, jumped 15 basis points over the past week. This jump in tender rejections follows back-to-back weeks where rejection rates took a breather after peaking at 26.68% on Sept. 9. Ultimately, capacity hasn’t substantially loosened and the elevated rejections keep upward pressure on rates as we begin the fourth quarter.
In the two previous years, capacity has loosened throughout September as tender rejections fall in a typical soft freight month. On brand for 2020, the typical freight path has not been followed — tender rejections are slightly higher at the end of the month this year.
While OTRI has fallen ~5% off the Labor Day peak, it remains at a remarkably high 25.66%. This indicates that nearly one in four loads is still being rejected at contracted rates across the country. Rejection rates in three of the six largest freight markets are outpacing the national average for a second week in a row. Although rejection rates have slowed since Labor Day, carriers are still rejecting more than enough contracted freight to keep spot rates high.
Spot rates: Absolute levels positive for carriers, momentum neutral
We begin the fourth quarter of this strange year with national spot rates a hair under $3 per mile. If you had told carriers they would see $3 a mile at any point during a global event like this, I believe many would have questioned your sanity. Yet, here we are with the Truckstop.com national spot rate average sitting at $2.93 per mile on Oct. 1.
After a week of declining rates in conjunction with slowing rejections week before last, rates sludged upward 2 cents a mile this week. Of the 100 lane pairings from Truckstop.com in SONAR, spot rates increased in just over half of them after taking a breather the previous week (65 declined last week).
On a national level, rates are still up 28% year-over-year, no change from the previous two weeks. 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. The yearly comps do not get tougher until the typical holiday peak season beginning in November. Until then, we expect to see spot rates running 20%-25% up year-over-year.
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.
This week’s jobs news reflected the improved momentum and change in tone we have seen in recent weeks and months. Initial jobless claims came in at 837,000 last week, which was better than consensus expectations of 850,000 and resumes the multiweek downward trend. This week’s 837,000 claims are down from last week’s 870,000, and the four-week moving average continues to trend lower. Jobless claims have now fallen in 22 of the past 27 weeks dating back to the peak weekly jobless claims number from late March. On the positive side, continuing claims (a rough proxy for unemployment) fell by nearly 1 million to 11.8 million.
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 2.3% year-over-year. This is nicely above the recent flattish range and well off the ~40% declines from late March and early April. As we usually note, keep in mind there is a beneficial mix shift from cash to debit ongoing that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 9% year-over-year and far outpacing credit card spending, which is down 6% year-over-year.
The main takeaways this week are that spending among the unemployed low-income cohort that is no longer receiving enhanced unemployment benefits remains surprisingly resilient. Second, the divergence in spending between goods and services remains very wide and very healthy for trucking, as everything on the right side of the x-axis in the chart below moves on a truck.
By category, online electronics (up 39% year-over-year this week) and online retail (up 60%) continue to be the standout performers. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker categories, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually.
Grocery is still strong but well off the highs, running up 9% year-over-year. Restaurant and bar spending has staged a huge comeback and is now down just 8% year-over-year. Brick-and-mortar retail spending has improved dramatically as most states reopen and was -3% year-over-year this week. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but lodging is way up off the bottom and appears to have gained momentum in recent weeks. Airlines and entertainment are now declining about 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 a mixed week for our transportation indices following mostly strong weeks over the past couple of months. Parcels was the best performer at 1.3%, and truckload was the worst at -1.8% this week.
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