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Shippers remain in control of pricing power as carrier sentiment rebounds

This Week’s DHL Supply Chain/FreightWaves Pricing Power Index: 30 (Shippers)

Last Week’s DHL Supply Chain/FreightWaves Pricing Power Index: 30 (Shippers)

Three-Month DHL Supply Chain/FreightWaves Pricing Power Index Outlook: 50 (Balanced)

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 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 10,112.43, which is 7% higher than October of 2018. While OTVI.USA has been trending upwards since mid-July at a healthy clip, recent economic indicators suggest headwinds ahead for manufacturing and the consumer. These data points include average hourly earnings, credit card debt and the University of Michigan household durable goods survey (more on this in the Economic Stats section below). 


Tender Rejections: Trend and Absolute Levels Positive for Shippers, Momentum Positive for Carriers.

Outbound Tender Rejections (OTRI.USA) are currently at 5.02%, which is down 18 bps from 5.20% last week as over-capacity in the trucking market continues to linger. Year-over-year comparables will continue to be difficult through the fourth quarter as rejection rates are still 65% year-over-year. 

Year-over-year comparables for OTRI.USA should become more realistic starting in mid-January of 2019, when rejection rates were cut in half – from 14% to 7% in two short weeks. OTRI.USA has yet to recover to these levels in 2019 and we have a bearish outlook for tender rejections to show enough life in the fourth quarter to bust out of its 2019 rut.


Carrier Expectations: Long-term Momentum and Trend Positive for Carriers. 

Carrier sentiment is rebounding in the fourth quarter after being in free fall for much of 2019. The outlook for higher line-haul rates is now 48% for the next six months, compared to 20% in the third quarter survey. This negative market sentiment  seems to have found the trough and is trending upward as tendered load volumes continue to remain 5% to 7% above October 2018 levels. 

Economic Stats: Positive Momentum for Shippers.

One point of emphasis that is key for the freight markets moving forward is that the U.S. consumer needs to stay strong in order for this economic cycle and the nascent freight market recovery to continue. While we still believe this to be the case, there are several signs emerging that the strength may be weakening – at least on the margin – which is a potential headwind for outbound tender volumes in 2020.

For example, average hourly earnings appear to have peaked in February 2019 and have decelerated for the third straight month down to 2.9% year-over-year growth (from a peak of 3.4%), revolving consumer credit fell 2% year-over-year in August (signaling a reticence by consumers to borrow) and the University of Michigan’s household durable purchasing intentions survey just posted a 10-year low dating back to 2008. Consumer spending power is a function of income, borrowing and drawing down savings. All three appear to be weakening and to have peaked. This does not mean we are on the precipice of an imminent recession; however, it is a recipe for continued weaker growth and loss of momentum in the stalwart of the U.S. economy.

Financial Markets: Positive Momentum for Shippers.

Also, the highest yielding and riskiest corner of the “junk” debt markets are underperforming superior-rated junk bonds by “an unprecedented margin” year-to-date according to a recent Barron’s article. This is a very closely watched metric by the investment community and a classic signal of a deteriorating economy because the lowest rated issues are also those most likely to default. When considering that high yield spreads are blowing out alongside a continued inverted yield curve (and its unparalleled track record in accurately predicting recessions), it becomes clear that the bond markets are not optimistic on future economic growth.

The prevailing narrative in the financial markets continues to be an ongoing deceleration and deterioration in economic data, slightly offset by a more accommodative Federal Reserve and wild swings in sentiment around the U.S.-China trade war. After last week’s highly disappointing ISM Manufacturing Survey (as well as the ISM Services miss), according to the Chicago Mercantile Exchange, odds for another rate cut at the Fed’s upcoming meeting at the end of October stands at 83%. Further, the market is predicting three rate cuts by the end of 2020, suggesting consensus expectations are anticipating prolonged weakness in the U.S. economy. All together, the deteriorating economic backdrop gaining momentum is a definite positive for shippers.

Wall St. Transportation Research Highlights: Absolute levels and momentum positive for shippers

Deutsche Bank was optimistic in its outlook for transportation stocks in 2020 and noted improving sentiment in recent meetings on the road with investors. In particular, the analysts noticed a patient, forward-looking tone among investors who were willing to look through near-term weakness to a potential strengthening in 2020. Third quarter misses and cuts to forward guidance/estimates, along with depressed valuation multiples, could create an advantageous setup.

Stifel Nicholas struck a cautious note in its third quarter preview for truckload earnings season this week, throwing cold water on the notion of a V-shaped recovery in freight markets off the bottom in the first half of 2019. Stifel views the latest rally in truckload stocks as nothing more than an oversold bounce that is likely to be overshadowed by continued weakness in volumes, rates and margins in upcoming reports. And the only prescription for such weakness that would lead to a sustainable recovery and strengthening in its view is “a significant uptick in volume or exit of capacity,” neither of which is anticipated.

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]

Kevin Hill

Kevin Hill is the executive publisher at FreightWaves, where he formerly served as director of editorial and research. Kevin is also the host of Put That Coffee Down, the popular freight sales podcast, a former freight broker and the founder of CarrierLists. Kevin holds an MBA from the University of Oklahoma.