Peak season still in question

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 9,552.28, down 1.55% year-over-year and down from 9,609.75 last week. The decline this week marks five out of the past six weeks in which national volumes have fallen week-over-week. OTVI has been negative from a year-over-year perspective for the last two weeks. Previously, it had been above 2018 levels since mid-July. The yearly comps do not ease up any time soon – 2018 experienced a 10% surge in volumes late in the peak retail season from early October to Thanksgiving.  The volume index now sits 5.1% below its 60-day moving average. Our belief of a lukewarm retail season is being solidified further with each week’s falling volume totals. 

SONAR: OTVI.USA

Tender Rejections: Trend and Absolute Levels Positive for Shippers, Long-Term Trend Positive for Carriers

Outbound Tender Rejections (OTRI.USA) rose 20 basis points (bps) this week, from 5.18% to 5.38%, and have reverted to the level reported two weeks ago. National outbound tender rejections appear to have settled into a tight range between 4.5-5.5%. Until it breaks out one way or the other, the outlook continues to be rather muted. OTRI now sits slightly above 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.

SONAR: OTRI.USA

Spot Rates: Absolute Level and Momentum Positive for Shippers 

Spot rates continued to sputter in the second week of November. The normal holiday seasonal rally in spot rates and volumes has proven elusive thus far. The DAT dry van national average rose 1.1% this week to $1.43 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 the intention to purchase trucks in the coming year, possibly worsening the loose capacity issue plaguing spot and contract rates.

Two weeks ago, 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 continue 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 off the bottom seen in September. 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

The Federal Reserve met Wednesday and announced that it will be staying put at current Fed Funds rates (SONAR: FEDFUND.USA), barring a major change in either economic growth or inflation. The market, per Chicago Mercantile Exchange (CME) odds for Fed Funds interest rate futures, is pricing in just a 50% chance of one more cut by the middle of next year and favors the Fed standing pat at its upcoming December meeting. This suggests the Fed sees a bottoming of economic growth on the horizon in the near-term, for the time being at least.

SONAR: FEDFUND.USA

Finally, Walmart (WMT) beat earnings and issued above consensus guidance for its fourth quarter and annual outlook. This was the second time this year that WMT has raised guidance. Given Walmart accounts for roughly 10% of overall U.S. retail consumer spending, there are positive read-throughs to both the economy and trucking. This is particularly true for peak season and this report is supportive of a more optimistic outlook to come if other retailers see similar shopping trends.

Walmart’s U.S. same store sales (SSS), the key metric that investors and Wall Street watch, grew 3.2% in the third quarter (better than the consensus of 3.1%). SSS were boosted by a nearly equal mix of traffic and tickets, a healthy indication. Walmart’s SSS have a high correlation with overall U.S. consumer spending historically, though the chain tends to prove more defensive in downturns as consumers tighten their buckles.

A robust grocery business helped Walmart’s online sales grow 41% in the third quarter, fueling the earnings beat and 21 consecutive quarters of growth in the U.S. SSS and ecommerce sales in the U.S. both accelerated sequentially from the second quarter. Even though WMT uses it own private fleet (SONAR: FCPF.USA) to move most of its goods, this has positive implications for reefer volumes (SONAR: ROTVI.USA) as can be seen in the high correlation of the chart below given the strength in grocery. Walmart’s quarter also has positive implications for dry van volumes (SONAR: OTVI.USA) and spot rates (SONAR: DATVF.VNU) due to broad-based strength seen across merchandise categories (both hard and soft goods).

All-in-all, this is just more confirmation that the U.S. consumer appears to remain in a good spot and the stalwart of the U.S. economy.

SONAR: STOCK.WMT, ROTVI.USA

Third-Quarter Transportation Earnings Highlights: Absolute Levels Positive for Shippers, Momentum Neutral

The market is sanguine on the transportation sector, even in the face of widespread disappointing third-quarter earnings. However, our proprietary truckload, less-than-truckload (LTL) and logistics stock indices fell for the first time in three weeks by 2%, 0.4% and 3.1% respectively. Industrials, as measured by the S&P 500 Industrial Sector SPDR ETF (Ticker: XLI), where freight and logistics represent roughly one-third of the ETF by weight, rose by 0.16% this week and by 6.48% (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. 

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@freightwaves.com, Seth Holm at sholm@freightwaves.com or Andrew Cox at acox@freightwaves.com.