This week’s DHL Supply Chain Pricing Power Index: 55 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 55 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 60 (Carriers)
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 Independence Day holiday had disrupted our outbound tender volume and reject indices due to their seven-day-moving-average nature. Weekly comparisons are rendered nearly useless, but when comparing the trough to previous years, we believe volumes will return to an elevated position by the weekend. Capacity has remained relatively tight as tender rejections have stayed above 15% this week.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
The outbound tender volume index (OTVI) is shown as a seven-day moving average to smooth out intraday volatility. As such, when national holidays occur and many drivers get off the road and shippers shut down, OTVI declines quickly and stays depressed for seven days. We are currently two days away from OTVI returning to nonholiday levels. Due to its nature, weekly volume comparisons are rendered useless.
We can, however, compare the depth of the trough to gain insights on where the index will be after the weekend. This year’s decline is in line with that of 2018, roughly 15%. 2019 experienced the sharpest decline in OTVI’s three-year history at nearly 19%. As we wrote last week, we understand the pre-Independence Day volume level was unsustainable. OTVI peaked at just under a series-high at 13,000 on July 2.
There is very little evidence that leads us to believe freight volumes will not continue to be elevated when the index bounces back. Consumer spending is still relatively strong given the unemployment backdrop, and consumer confidence partially rebounded in June. Time will tell how much the secondary coronavirus outbreak affects freight volumes. During the height of the first outbreak, freight volumes went on a wild ride due to the panic-buying then subsequent shutdowns. It will be the latter event that hampers freight volumes. Fortunately, this time around the lockdowns may not need to be as severe.
Tender rejections: Absolute levels and momentum positive for carriers
The outbound tender reject index (OTRI) is exhibiting some stickiness at a high level. OTRI has declined slightly since its latest peak just before the Fourth but remains quite high at 15.13%. The supply-demand dynamic of May, June and July has been much different than March and April. During March we saw volumes and rejections rise in stepwise fashion to all-time highs in a matter of weeks. This time around it has taken much longer for freight volumes to fill markets, and it has taken even longer for carriers to gain the confidence to reject contracted loads in favor of spot market options.
Another difference in this tightening environment is that volumes will remain elevated for some time unlike in April when volumes plummeted to holiday levels due to nationwide lockdowns. We should expect to see tender rejections in the double-digit range as long as volumes remain elevated — all signs point to this happening.
The reefer segment continues to be particularly strong for the carriers. Volumes have been gushing from the West Coast and reefer tender rejections have actually risen this week while the other modes have not. Carriers have begun looking for other opportunities outside their contracted freight in this environment of freight abundance. This level of tender rejections indicates upward pressure on rates. We are on the train toward a melt-up in pricing if volumes can continue to flow.
Spot rates: Absolute levels positive for shippers, momentum positive for carriers
Much like SONAR’s OTVI, the Truckstop.com spot rate and spot volume indices are calculated and visualized on a seven-day-moving-average basis. So, weekly comparisons are highly distorted and offer little insight into the market this week. When looking at volumes, more than three-quarters of the 100 lanes in SONAR are negative week-over-week, but that is to be expected given the preholiday freight push. And when examining the spot rates from Truckstop.com, almost 90% are positive week-over-week due to the holiday premium afforded to many drivers.
We do believe the trend of climbing spot rates will continue. The parts of the economy that have been and will be hit by possible lockdowns are service-based industries that do not move a large percentage of freight anyway. Signs are pointing to a longer period of elevated volumes and tightening capacity into Q3.
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
By far the most widely watched economic data point this week was initial jobless claims, which give us one of the best close-to-real-time indicators of the overall economy.
This week’s jobs news continued the momentum and changed the tone dramatically from the past 15 weeks since COVID-19 began to lead to massive layoffs.. Initial jobless claims came in at 1.31 million last week, which bested consensus expectations of 1.39 million and fell 99,000 from a week earlier. The unemployment rate now stands at just 11.1% (even though it is strange to say 11% is low), down from the COVID peak of 14.7%. Lastly, there was also positive news on continuing claims, which dropped 698,000 from the previous week and came in below consensus expectations at 18.1 million (compared to the 18.9 million consensus).
U.S. initial jobless claims/gains (2007-present)
Source: CNBC, U.S. Department of Labor
Taking a deeper look at more granular card spending data from Bank of America Merrill Lynch for the week ending July Fourth, several things stand out. The card spending data jumped to 5.2% year-over-year this week, but that result should be taken with a large grain of salt due to distortions from the holiday.
The good news is that consumer spending appears to have convincingly bottomed and the absolute level of spending is quite strong all things considered, though it continues to retrace to the downside in COVID-heavy Sunbelt states and we expect the data to take a step back next week as the benefit from the holiday bump passes. .
As we have noted, there is a benefit to this data because there is an ongoing aggressive mix shift from cash to debit card spending due to the health risks of cash. Debit card spending is faring much better than credit card spending (up 15% y/y compared to down 7%).
Overall card spending (both debit and credit) was 5.2% y/y for the trailing seven days, a big acceleration from -3.8% last week and a huge improvement from the trough of -40% during the last five days of March (and -18% nine weeks ago). While we do not want to throw cold water on the stunning progress in consumer spending since the bottom, the fact that there is a COVID-19 resurgence in many states could stall the momentum and determine the path for consumer spending going forward.
Amazingly, retail sales ex-autos continue to run up 10% y/y for the trailing seven days. Again, we would never have imagined that consumer spending ex-autos would be positive (much less strongly positive) y/y in the midst of the worst recession since the Great Depression.
It remains to be seen how sustainable this boost in consumer spending is. It has been aided by stimulus checks, generous unemployment insurance and the reopening of most states, but it is certainly good news for now. This could be an issue if unemployment benefits are allowed to expire after July, though there has been talk of forthcoming extensions for the past two weeks in Washington.
Every category has distinctly bottomed, though airlines, lodging and entertainment continue to show 50%-80% declines in revenue. Lodging is clearly improving, now running down closer to 55% from 90%-100% earlier. Restaurant and bar spending is now down only about 20% over the past week, well off the lows of down 65%-75%; however, the COVID-19 resurgence is a major risk to this category (as well as to hotels, travel and leisure). Online electronics and e-commerce continue to exhibit scorching growth of 122% and 90%, respectively, on average, for the past week. We had previously expected some of the strong COVID-19 categories to increasingly delecerate as the economy continues to open, but now we are not so sure as visibility is clouded. Furniture has emerged as an extremely strong category with sales there up 35% year-over-year this week. Grocery continues to be strong and reaccelerated to up 15% year-over-year as restaurant spending flattens out. Clothing spending was up 2% year-over-year (an enormous jump off the trough) and home improvement remains strong, as it has been for months. Lastly, brick-and-mortar retail spending has definitely bottomed (down only 4%) but we are watching this category closely as the COVID resurgence is a big risk.
The fabulous news is that every category is experiencing a strong recovery and has bottomed now — even airlines and entertainment, which have been terrible for four months straight. Airlines only saw an 80% decline in spending this week, which sounds crazy but is up from down 100% or more (refunds) weeks ago. Consumer spending will be important to watch to gauge when the economy and freight volumes will pick up; the card data indicates momentum in terms of improving volumes off of the bottom should continue. The momentum in card spending closely matches the improvement in OTVI since the bottom in mid-April. This week’s early warning sign could be something to watch very closely in terms of implications for trucking moving forward if the weakening continues.
Source: Bank of America Merrill Lynch
Transportation stock indices: Absolute levels and momentum positive for carriers
It was a great week for our transportation indices following several strong weeks over the past month. Truckload was the best performer at 4.9% and parcels was the worst at 1.3%.
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