This Week’s DHL Supply Chain/FreightWaves Pricing Power Index: 20 (Shippers)
Last Week’s DHL Supply Chain/FreightWaves Pricing Power Index: 20 (Shippers)
Three-Month DHL Supply Chain/FreightWaves Pricing Power Index Outlook: 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 have the advantage.
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 9,609.75. OTVI is now negative year-over-year for the first time since mid-July. The next couple weeks will determine whether this negative volume comparable is the result of weak volumes or simply tough 2018 comps. The volume index now sits 5.43% below its 60-day moving average and is down nearly 4% since last week’s DHL Supply Chain PPI report. Mark Rourke, chief executive of Schneider National Inc., noted in The Wall Street Journal: “We have seen some seasonality and promotional volumes related to the traditional retail peak season, but they are well below the frothy conditions of last year.” Another week passed without any material surge in volumes from the peak retail season, and it leads us to agree with Rourke that this holiday season will not be as lucrative as 2018’s.
Tender Rejections: Trend and Absolute Levels Positive for Shippers, Long-Term Trend Positive for Carriers
Outbound Tender Rejections (OTRI.USA) fell 20 bps this week from 5.38% to 5.18% and have reverted to the level reported two weeks ago. This reverses a short-term trend sustained since mid-October when rejections fell to 4.7%. OTRI now sits slightly below its 60-day moving average. Despite used truck prices falling in the past few months, capacity is still loose without any clear indicators to build a narrative for capacity to tighten or line-haul rates to bounce.
Spot Rates: Absolute Level and Momentum Positive for Shippers
Spot rates continued to sputter in the first week of November. The normal holiday seasonal rally in spot rates and volumes has proved elusive thus far. The DAT dry van national average rose 2.9% this week to $1.41 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. That 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
We reiterate our expectation of significant downward pressure on contract rates. Mounting pressures from shippers in rate negotiations will persist into 2020. Major North American carriers have expressed intention to purchase trucks in the coming year, possibly worsening the loose capacity issue plaguing spot and contract rates.
Last week we referenced a major freight broker reporting it saw significant downward pressure on contract renegotiations for 2020 running in the negative 12% range year-over-year. We restate that this broker is big enough to be representative of 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.
Economic Stats: Positive Momentum for Carriers
The U.S. and China appear to be very close to reaching a “phase one” initial trade deal in which both sides have agreed to simultaneously cancel some existing tariffs on each other. As a result, the S&P 500 is hitting a new all-time high while 10-year U.S. Treasury bond yields have surged. The markets appear to be prognosticating a rosier outlook for industrial production and global economic growth prospects, a distinct positive for carriers if manufacturing and industrial tied volumes can finally begin to improve heading into 2020.
SONAR: BOND.10YR, STOCK.SPX
U.S. nonfarm payrolls (SONAR: EMPS.NFRM) grew by a seasonally adjusted 128,000 jobs in October, according to the Labor Department. This easily bested consensus of 85,000 and was surprisingly strong despite the drag from the General Motors strike and a temporary decline in the federal workforce. The unemployment rate increased slightly but still sits at close to a 50-year low. Within the overall figure, hospitality, retail and health care were the biggest positive driving forces. U.S. payrolls have now grown for an all-time record 109 months straight.
In October’s report, trucking jobs (SONAR: FCFH.USA) increased for the first time in three months, by 1,300 jobs, standing out among a relatively weak figure for total logistics jobs growth heading into the peak season. The trucking industry added just 11,000 jobs over the past year, the slowest pace of growth in nearly three years. We expect the slowing growth in trucking jobs, new truck orders running well below replacement demand and widespread implementation of hair testing of drivers to eventually reduce capacity enough to boost spot rates (SONAR: DATVF.VNU) sometime in 2020.
SONAR Tickers: EMPS.NFRM, FCFH.USA
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 third-quarter earnings. Our proprietary truckload, LTL and logistics stock indices surged again this week by 4.8%, 7.8% and 6.7%, respectively. Industrials, as measured by the S&P 500 Industrial Sector SPDR ETF (Ticker: XLI), where freight and logistics represent roughly a third of the ETF by weight, rose by 4.4% this week and by 8.4% (leading all 11 S&P 500 sectors) over the past month. Investors appear to be discounting an increasing likelihood of a global synchronized recovery in 2020 led by more economically sensitive and cyclical industries like trucking.
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