This week’s DHL Supply Chain Pricing Power Index: 40 (Shippers)
Last week’s DHL Supply Chain Pricing Power Index: 45 (Shippers)
Three-month DHL Supply Chain 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 have the advantage.
The DHL Supply Chain 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) has gone horizontal below its March 2018 starting point of 10,000. The index currently sits at 9,760.63, which is slightly above its yearly comparable by less than 1%. Through the first two weeks of the year, we haven’t seen the year-over-year growth we expected due to the current spread between contract and spot rates. OTVI is an index of accepted tender volumes at contract rates.
The current spread between contract and spot rates is much higher than the spread this time last year. Our volume index last year didn’t hit 10,000 until the end of February. This is not only because freight volumes were relatively weak but also because many carriers were still looking to accept spot rate loads due to the spread being much tighter between contract and spot. This led us to believe OTVI may exhibit strong year-over-year growth in the first two months of 2020, but that expectation has not come to fruition.
Tender rejections: Absolute levels neutral; momentum positive for shippers
After peaking at 14.25% on Christmas Day, the Outbound Tender Reject Index (OTRI) has slipped to 7.52%. This is three straight weeks of declining tender rejections off the peak. The fall was expected as drivers got their wheels turning again after spending time at home over the holidays. As shown in the chart below, a kindred decline occurred last year.
The index experienced a similar but more significant fall at the beginning of 2019, when the index dropped by half in just four weeks. We expect a similar acceleration to the downside in the coming weeks, but for now OTRI is still near 2019 highs.
SONAR: OTRI.USA (Green — 2018-19; white — 2019-20)
Spot rates: Absolute level positive for shippers; momentum neutral
Spot rates have fallen from Christmas highs of $1.62/mile to a current $1.51/mile.
The DAT freight rate (DATVF.VNU) has likely peaked, at least for the next few weeks. Spot rates ended the year on a recurring seasonal tear, increasing 15% over the last eight weeks of the year. But as we wrote last week, the January blues are in full session and we don’t expect any band-up in spot rates in the coming weeks.
The Freight Intel Group conducts a quarterly survey of small carriers (five to 100 trucks) to grasp their sentiment of volumes, rates, diesel prices and expectations. Expectations for line-haul rates have improved off a frightening Q319 outlook. Six months ago, 60% of small carriers expected lower rates for the next period compared to the same period in the previous year. This isn’t all too surprising — 2018 line-haul rates were astronomical. Regardless, expectations are improved but not overly positive for line-haul rates for the first three months of 2020 compared to the first quarter of 2019.
Source: Q1 — 2020 Carrier Outlook (SONAR)
SONAR: DATVF.VNU (Orange 2017-18; green 2018-19; blue 2019-20)
Economic stats: Neutral for both shippers and carriers
Target reported disappointing holiday comparable sales of 1.4%, missing fiscal fourth-quarter guidance of 3-4% and the Wall Street consensus of 3.8%. Target saw distinct weakness in electronics (RESL.ELEC), toys and home goods. This came as a shock to Wall Street, as prior to Wednesday, Target’s stock had nearly doubled off of the 52-week low. Over the last several quarters, Target had consistently shown same-store sales and digital/e-commerce momentum, disproving bears who thought the company was past its prime due to competition from Amazon. However, Target saw an abrupt, negative shift in momentum with comparable store sales falling from 4.5% last quarter to 1.4% this quarter. In addition, digital sales decelerated sharply to 19% compared to the recent multi-quarter trend of 30% or better (and 31% y/y growth in the third quarter).
Target is an important company to watch given it accounts for about 1% of overall U.S. retail sales and is a big-box, broadline retailer that can be a barometer of underlying consumer health. Combined with disappointing reports out of beaten-down retailers such as Macy’s, J.C. Penney and Kohl’s, the question is now whether Target’s disappointing earnings report is indicative of a broader weakening of the American consumer or more of a fourth-quarter anomaly (due to tough comparisons and a shortened holiday selling season compared to the previous year). For freight, any further significant signs of weakness to the robust American consumer is a negative for dry-van freight volumes (VOTVI.USA) and would be worrisome in light of the continued weakness in manufacturing.
Also, we received more positive economic data Thursday with weekly jobless claims coming in at 204,000 (lower than consensus expectations of 216,000) and retail sales came in at 0.3% higher month-over-month (matching consensus). The latter corresponds to a robust 5.8% growth year-over-year, which throws cold water on the notion of a meaningful, broad retail spending slowdown in the holiday season.
Transportation stock indices: Absolute levels positive for shippers; momentum positive for carriers
The FreightWaves transportation stock indices were on fire this week as expectations grow for a firming trucking market in 2020, and there were several positive sell-side analyst reports issued (including upgrades of many of the stocks in our benchmark indexes).
Our logistics index led the way this past week, up 9.9%, driven primarily by XPO Logistics, which announced the exploration of strategic alternatives — including the possible sale of its freight brokerage, last mile, Europe and logistics businesses. As a result, XPO’s stock has risen over 20% week to date. Next, our LTL index rose 7.4% this week, driven mostly by Old Dominion Freight Lines (ODFL), which was up 7.2%.
The truckload and parcel indices were up 3.7% and 1.1% this week, respectively, a strong showing in any normal week. After underperforming over the trailing three, six and 12 months, transportation stocks (as measured by the Dow Jones Transportation Index) are finally starting to outperform the overall market, rising 2.7% year-to-date thus far compared to 2.4% for the S&P 500 Index.
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