Thanksgiving volatility shifts power in carriers’ direction

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 10,452.65, up nearly 5% for the second week in a row. It is typical for load volumes to surge just prior to a national holiday. Due to Thanksgiving being a week later this year, the straight yearly comparable provides little insight. However, comparing the peak volume totals the day preceding Thanksgiving sheds some light on the demand picture. This year OTVI peaked 10,452.65, just 52.10 index points higher than the 2018 peak. One could argue because Thanksgiving is a week closer to Christmas this year, that peak should be higher as shippers have less time to get retail products on the shelves. Although this typical holiday surge is beneficial for the carriers, our holiday retail season outlook remains neutral. 

SONAR: OTVI.USA

Tender Rejections: Absolute Levels Positive for Shippers; Short-term and Long-term Trends Positive for Carriers

Outbound tender rejections rose significantly for the second straight week to 7.26%. This is now the highest level since the beginning of March. The rapid acceleration in our rejection index is not uncommon leading up to a holiday, but this year’s rise has been larger than last year’s. In the two weeks preceding Thanksgiving 2018, OTRI increased 16.53%. In the past two weeks rejections have risen nearly 30%, with the majority of that increase coming in the past seven days. This is a typical, but much needed short-term capacity tightening environment for the carriers. 

SONAR: MAPS

Spot Rates: Absolute Level and Momentum Positive for Shippers 

Spot rates continue to remain listless with little volatility. The DAT dry van national average dipped again slightly this week from $1.43 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 in this lower band for an indefinite period based on capacity metrics from OTRI.USA and weakening demand indicators from the economy. 

Contract Rates: Absolute Level and Momentum Positive for Shippers

Contact pricing continued its negative year-over-year trend in October. Using the  Producer Price Index (PPI.LDTL) as a proxy for contract rates, contract rates are down 2.85% from October 2018 levels. Compared with September’s year-over-year PPI.LDTL drop of 2.5%, contract pricing appears to be dropping at an accelerating pace.  Susquehanna Financial Group analysis of TruckloadRate.com data confirms that the decreasing contract rates accelerated in October. 

We believe this trend in contract rates will continue as shippers rebid rates and/or move more freight onto the spot market. An early indicator for a deceleration in the downward movement of contract rates will be when spot rates climb 10% to 15% from their current position.     

Source: Susquehanna Financial Group analysis of Truckstop.com (Spot) and TruckloadRate.com (Contract)

October Class 8 Truck Orders: Absolute Level and Momentum Positive for Carriers

October net new Class 8 truck orders (SONAR: ORDERS.CL8) came in at 21,864. This was up 72% from 12,692 in September and down 50% y/y from 43,526 in October 2018. While the latter sounds bad, it is actually a significant improvement from down 70% y/y in September and the trough of -80% y/y in July. October’s orders also came very close to breaching our estimate of replacement rate of approximately 23,000 monthly net new truck orders (275,000 annualized) for the first time in a year. October’s orders represent the 12th straight month of y/y declines.

In past economic updates we have written about how net new Class 8 truck orders running well below replacement demand is bullish for both future spot rates (SONAR: DATVF.VNU) and outbound tender volumes (SONAR: OTVI.USA). This is likely sometime in the back half of 2020, as the previous annualized shortfall of new truck orders was equivalent to about 5% of capacity coming out of the market. Given a six- to nine-month lead time for new truck orders, it takes time for orders running below replacement demand to feed into an increasing supply and demand imbalance (in favor of demand). Monthly net new truck orders (SONAR: ORDERS.CL8) tend to correlate extremely well with spot rates (SONAR: DATVF.VNU) historically as can be seen in the chart below.

There is the valid question of whether increasing net new truck orders is bullish or bearish for truckload capacity in 2020. We think given how far and long orders have been depressed and running well below replacement demand that some signs of life in new truck orders is actually bullish for near-term sentiment. We would lastly note that October is seasonally a big month for new truck orders for the upcoming year and would caution not to extrapolate one month into a new trend (yet, at least).

SONAR: ORDERS.CL8, DATVF.VNU

Economic Stats: Positive Momentum for Shippers

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 imposed on each other. As a result, the S&P 500 is currently trading at a new all-time high while 10-year U.S. Treasury bond yields have climbed significantly 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 volumes tied to manufacturing and industrial can finally begin to improve heading into 2020.

This week, the Conference Board’s Consumer Confidence Index dipped for the fourth month in a row, coming in at 125.5 and missing consensus expectations of 126.6. November’s reading fell from 126.1 in October. The slowing of the index confirms what we already know – economic growth is slowing, and currently tepid, though not negative. Two-thirds of the U.S. economy is driven by consumer spending, and consumer confidence is paramount in driving GDP, credit creation and overall economic well-being in the U.S. It is too early to be worried about consumer confidence at this point as low unemployment and strong consumer spending still abound. For example, the National Retail Federation expects holiday spending to grow 4% y/y this peak season.

Slipping consumer confidence and slowing economic growth are a net negative for the trucking economy by way of slowing dry van volume growth (SONAR: VOTVIY.USA). If continued, waning consumer confidence could spill over and negatively affect everything from employment to consumer spending (SONAR: RESL.USA) broadly across all soft and hard good categories. Consumer confidence is a primary driver of consumer spending, which due to its size and importance, can also take down the whole economy if it goes negative. Should consumer spending and confidence continue to slow, it raises some questions about consensus expectations for a rebound in dry van volumes (SONAR: VOTVI.USA) in 2020 due to the freight economy facing easy comparisons from a freight recession.

SONAR: RESLG.USA, VOTVIY.USA

Transportation Stock Indices: 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. It was a very solid week for our proprietary truckload, less-than-truckload (LTL), logistics and parcel stock indices as they rose by 2.1%, 1.5%, 2.4% and 1.6%, respectively. Transportation equities easily outperformed the S&P 500, which rose 1.2% this week. 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.