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The market shakes off its holiday hangover

This week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)

Last week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)

Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 35 (Shippers)

The FreightWaves 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.

This week’s Pricing Power Index is based on the following indicators:

Volumes pick up sharply before slipping

Tender volumes rebounded significantly after last week’s holiday slumber. While pent-up freight demand is typically unleashed in the week following a federal holiday, 2022 has had its fair share of unseasonable (and unwelcome) surprises: Notably, in the period following Independence Day, volumes made only a muted recovery. Although it is certainly a relief to see freight demand recover, there remain a few warning signs on the horizon.

Tender volumes fail to impress:
SONAR: OTVI.USA: 2022 (white), 2021 (green) and 2020 (orange)
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This week, the Outbound Tender Volume Index (OTVI) fell 0.47% on a two-week basis. (A two-week basis is used to ensure accurate comps in the week following a holiday.) That figure might not be impressive on its own, since it neglects OTVI’s sharp rise on Monday that saw the index return to levels last seen in late July. On a year-over-year (y/y) basis, OTVI is down 25%, although y/y comparisons can be colored by significant shifts in tender rejections. OTVI, which includes both accepted and rejected tenders, can be artificially inflated by an uptick in the Outbound Tender Reject Index (OTRI).

Accepted volumes are below 2020 levels:
SONAR: CLAV.USA: 2022 (white), 2021 (green) and 2020 (orange)
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Contract Load Accepted Volume (CLAV) is an index that measures accepted load volumes moving under contracted agreements. In short, it is similar to OTVI but without the rejected tenders. Looking at accepted tender volumes, we see a slight decline of 0.38% on a two-week basis but also a fall of 9.8% y/y. This y/y difference confirms actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI to lower levels.

Mixed signals hit the truckload market as threats of transport strikes boiled both at home and abroad. The last holdouts of the rail workers’ unions, which were poised to strike Friday, tentatively agreed to a last-minute labor deal. Should the strike have proceeded, it would have been — speaking frankly — a major boon to the trucking industry. With their usual mode of transport foreclosed, rail shippers likely would have scrambled to push their freight over the road. This confusion and spike in demand would have given carriers immense leverage when naming rates, though not all rail freight could have been converted to truckloads. There is a slim possibility that the labor negotiations may yet fail, but the forthcoming vote by union members appears to be largely ceremonial.

Meanwhile, British dockworkers and French air traffic controllers are bearing down on strikes of their own. This latest string of planned stoppages is preceded by similar threats and measures taken by Lufthansa employees, German dockworkers and ground staff in Australia. While most of these strikes were forestalled (or else did not severely impact domestic freight flow), they do signal a sea change among workers in the transportation sector. It goes without saying that any disruption to U.S. import volume would lead to a further decline in truckload volumes, so carriers should keep a close eye on news of foreign labor negotiations.

At the heart of many union workers’ complaints is the disparity between wages and inflation. The American consumer shares these concerns, as the Consumer Price Index (CPI) — a measure of inflation — has rapidly outpaced wage growth for many. Headline inflation in August was 8.3% y/y and 0.1% on a month-over-month (m/m) basis. These figures might suggest that price hikes are moderating, but the decline is largely driven by falling energy prices. 

The core CPI, which excludes volatile items like gasoline and food, reported a 6.3% y/y and 0.6% m/m increase in prices. Truth be told, I do not place great emphasis on core inflation figures, since consumers ultimately use the same wallet for gas and food as they do for discretionary purchases. But the core CPI numbers do show that price increases are finally being passed down from producers to consumers by an appreciable degree.

Volumes recover after the holiday week:
SONAR: Outbound Tender Volume Index – Two-Week Change (OTVIF).
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click here.

Of the 135 total markets, 59 reported increases in tender volume on a two-week basis.

The Port of Savannah logged another record-high month of volume in August, with the Georgia Ports Authority (GPA) stating that it saw an 18.5% y/y rise in twenty-foot equivalent units handled in the month. The GPA maintained its commitment to accommodating more capacity via construction that should conclude by June 2023. The Savannah market has already seen some of this increased activity spill over into the truckload market as freight demand is up 7.92% on a two-week basis.

By mode: On Monday, reefer volumes jumped to levels not seen since early April and, although having declined, remain elevated. The Reefer Outbound Tender Volume Index (ROTVI) is up 3.6% on a two-week basis, seeing a push by seasonal produce like potatoes and apples. Accordingly, the Pacific Northwest will be the hottest market for refrigerated trucks this month. ROTVI is down 28% y/y, but that difference is largely attributable to plummeting reefer rejection rates. Accepted reefer volumes are up 3.86% y/y.

Dry van volumes did not see such a dramatic return to form but were able to keep their post-Labor Day momentum throughout the week. The Van Outbound Tender Volume Index (VOTVI) is currently up 0.26% on a two-week basis. VOTVI is down 26% y/y but, as is the case with ROTVI, this gap is due to declining rejection rates. Accepted dry van volumes are down 10.4% y/y.

Tender rejections rise, fall and rise again

The most telling index for the truckload market — in my humble but biased opinion — is OTRI, as it shows the widespread erasure of carriers’ leverage over such a short period of time. Despite getting a bump from limited capacity during Labor Day, OTRI was unable to hold onto its gains and instead slipped to a new cycle low of 5.24% on Sunday.

OTRI almost broke below 5%:
SONAR: OTRI.USA: 2022 (white), 2021 (orange) and 2020 (green)
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Over the past week, OTRI, which measures relative capacity in the market, rose to 5.55%, a change of 11 basis points (bps) from the week prior. OTRI is now 1,611 bps below year-ago levels.

While tender rejections did rise early in the week, OTRI proved again that it could not sustain upward momentum. This tug-of-war, in my view, shows that OTRI has settled into its point of dynamic equilibrium. Until contract rates prove less hospitable than spot rates, it is unlikely that we will see rejection rates rise outside of a severe weather event or some other act of God.

Adding to carriers’ woes is the Census Bureau’s latest print of retail sales in August. Excepting a spike in sales of motor vehicles and parts (which rose 2.8% m/m), retail sales fell a seasonally adjusted 0.5% m/m. After accounting for inflation, retail sales (excluding gasoline, motor vehicles and parts) fell a seasonally adjusted 1.4% y/y in August. We have long discussed goods satiation among consumers, but it is still striking to see it play out during what was supposed to be a busy back-to-school spending season.

To make matters worse, it is increasingly unlikely that consumers will inject greater demand into the goods economy anytime soon. The average rate on a 30-year fixed mortgage rose to 6.02% this week — its highest level since the 2008 financial crisis. This meteoric rise in mortgage rates is a byproduct of the Federal Reserve’s extreme hawkishness on raising interest rates to curb inflation. Unfortunately, I do not believe that the major drivers of inflation are able to be subdued by broad rate increases. 

It is possible that I share this belief with the Fed, which would instead be positioning pressure release valves for an imminent market collapse. That is, the rate increases are mainly to be used as something that can be removed to kick-start future recovery, rather than something used to club inflation into submission right now. Whatever the case may be, a 75 bps interest rate hike is all but assured in the Fed’s September meeting, with the market pricing in a 25% probability of a full 100 bps raise.

Capacity tightens in Colorado:
SONAR: WRI (color)
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The map above shows the Weighted Rejection Index (WRI), the product of the Outbound Tender Reject Index — Weekly Change and Outbound Tender Market Share, as a way to prioritize rejection rate changes. As capacity is generally finding freight, only a few regions this week posted blue markets, which are usually the ones to focus on.

Of the 135 markets, 63 reported higher rejection rates over the past week, though 35 of those reported increases of only 100 or fewer bps.

Colorado markets saw rejection rates spike this week as the Colorado State Patrol announced it would be upping brake inspections and safety checks along U.S. Highway 50. The only eastbound runaway ramp between Sargents and Poncha Springs will be out of commission until late October, according to the Colorado Department of Transportation. On a w/w basis, rejection rates climbed 1,177 bps in the Grand Junction market and 733 bps in Denver.

SONAR: VOTRI.USA (white); ROTRI.USA (green); FOTRI.USA (orange)
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By mode: Reefer rejection rates have fallen the most sharply after seeing a bump on Labor Day, with the Reefer Outbound Tender Reject Index (ROTRI) losing nearly 120 bps in that 10-day period. At present, ROTRI is up 15 bps w/w at 6.7%. Given the recent surge in autumn produce and its corresponding influence on ROTVI, it would not be surprising to see ROTRI rise over the coming weeks.

Flatbeds, while also having lost their holiday gains, are in a much better position than they were throughout most of August. The Flatbed Outbound Tender Reject Index (FOTRI) fell 27 bps w/w to 16.2%. Considering that FOTRI averaged 15.7% last month, and that it fell to 13.2% two weeks ago, things could have been much worse for flatbeds. Industrial production did decline slightly in August and housing starts — the August data for which has yet to be released — are likely depressed by crushing mortgage rates.

Van rejection rates, however, are middling. Although the Van Outbound Tender Reject Index (VOTRI) is the only such index to be in the black this week, having risen 10 bps w/w, it remains largely unchanged from its position two weeks prior. As usual, VOTRI continues to be a major driver behind the performance of the overall OTRI — for better or worse (mostly worse).

Carrier rates are stable, for the most part

Unlike tender rejections, carrier rates appear to be retaining some of their holiday momentum from the previous week. Despite another consecutive decline in diesel prices, the National Truckload Index (NTI) was boosted by strong linehaul rates. While carriers will surely find this trend agreeable, I remain somewhat skeptical about the longevity of rate growth in the spot market, since volumes are still weak and tender rejections are still declining.

Contract and spot rates are less than ideal:
SONAR: National Truckload Index, 7-day average (white; right axis) and dry van contract rate (green; left axis).
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This week, the NTI fell 2 cents per mile to $2.68. While that might not seem like a movement that would break the Richter scale, the lack of a major downturn is itself a positive sign. The linehaul variant of the NTI (NTIL), which excludes fuel costs and other accessorials, similarly fell 2 cents per mile w/w to reach $1.90.

Contract rates, which are base linehaul rates like the NTIL, have yet to see any holiday boost as they are reported on a two-week delay. Contract rates remained unchanged this week, holding steady at $2.76. While it might be expected that contract rates will rise for Labor Day, they fell significantly during the previous federal holiday, contrary to all seasonality and common sense. Regardless, it is likely that they have already found their measure for the remainder of the quarter, given the average cycle of requests for proposals.

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The chart above shows the spread between the NTIL and dry van contract rates, showing the index has continued to fall to all-time lows in the data set, which dates to early 2019. Throughout 2019, contract rates exceeded spot rates, leading to a record number of bankruptcies in the space. Once COVID-19 spread, spot rates reacted quickly, rising to record highs on a seemingly weekly basis, while contract rates slowly crept higher throughout 2021. 

Once spot rates started the rapid descent from the stratosphere in late February, the spread between contract rates and spot rates narrowed as contract rates continued to increase throughout the first quarter. This caused the spread between contract and spot rates to turn negative for the first time since July 2020, as contract rates currently outpace linehaul spot rates by 85 cents per mile.

SONAR: FreightWaves TRAC rate from Los Angeles to Dallas.
To learn more about FreightWaves TRAC, click here.

The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, seems to have met its floor. Over the past week, the TRAC rate grew 3 cents per mile to reach $2.67. The daily NTI (NTID), which is at $2.68 per mile, is once again outpacing rates from Los Angeles to Dallas.

SONAR: FreightWaves TRAC rate from Atlanta to Philadelphia.
To learn more about FreightWaves TRAC, click here.

On the East Coast, especially out of Atlanta, rates did suffer a decline but are still beating the NTID. The FreightWaves TRAC rate from Atlanta to Philadelphia fell 8 cents per mile this week to settle at $2.74. Rates along this lane have been falling since mid-July, when the TRAC rate was $3.48 per mile. Low inventory of diesel fuel in the Northeast could soon drive outsized prices, which in turn would place upward pressure on rates to the region.

For more information on the FreightWaves Passport, please contact Kevin Hill at [email protected], Tony Mulvey at [email protected] or Michael Rudolph at [email protected].

Michael Rudolph

Michael Rudolph is a research analyst at FreightWaves and is a former freight broker. Prior to entering the logistics industry, Michael worked in academia. He holds an MA from the University of Chicago.