DHL Supply Chain Pricing Power Index: Welcome To The Top, Get Comfortable

This week's DHL Supply Chain Pricing Power Index: 80 (Carriers)

Last week's DHL Supply Chain Pricing Power Index: 85 (Carriers)

Three-month DHL Supply Chain Pricing Power Index Outlook: 80 (Carriers)

The DHL Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.

It may be time to call the top, but it also may be meaningless. Freight volumes may have peaked, but they will remain elevated double digits over last year for the foreseeable future. Tender rejections may have peaked near Labor Day, but carriers will be rejecting freight so long as spot rates outpace contract. So when we say the market may be peaking, don't expect any sudden changes. The underlying dynamics of the market remain: Capacity is fundamentally constrained and demand is unwavering with strong imports and retail demand. 

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) fell this week for the first time in many weeks. The decline was marginal, only -1.3%, and has improved as tender volumes have accelerated into the weekend. The rate of decline was more pronounced when accounting for the extremely high level of rejected tenders in OTVI. The accepted tender volume index (calculated using the inverse of OTRI) fell more than 3% week-over-week. 

15,414 * (1 – .25) = 11,499 accepted loads for Sept. 23, 2020

10,392 * (1 – .053) = 9,929 accepted loads for Sept. 23, 2019

Using this metric to control for the high level of rejected tenders allows us to get a more accurate understanding of the true demand level. While tender volumes and overall freight demand remain at historically high levels, a 3% decline in accepted tenders is noteworthy. However, the Passport Research team feels this is more like a seasonal breather or a cooler period between waves of imports and inventory restocking. In their most recent weekly trucking update, "The flattening," the team referenced the carrier-facing headcount expansion at brokerages and the wage inflation at carriers as evidence this rally has legs. 

Accepted freight tender volumes are running up 16% year-over-year despite the weekly decline. October should give us a strong indication of demand through the end of year. Our expectations have not changed in recent weeks and we still believe the rest of the year is bright for the freight market. Retail inventories are down 12% year-over-year, while sales are up 11%. The possibility of another round of stimulus before the election would aid this argument. While consumer confidence has faltered, spending is remaining strong given the economic backdrop. These factors lead us to believe that freight volumes could end with a massive bang.

SONAR: OTVI.USA (2020 – Blue; 2019 – Orange; 2018 – Green)

Tender rejections: Absolute levels and momentum positive for carriers

After briefly falling below 25% last week, the Outbound Tender Reject Index (OTRI) has accelerated into the weekend and sits at 25.47%. We have written in recent weeks that we believe the upper bound of OTRI is roughly 25%. We very rarely see OTRI reach these levels, and when it does, it never stays above 25% for long. In fact, the longest period above 25% came in the spring of 2018 (a very hectic freight environment) with a duration of roughly three weeks. This most recent journey above 25% is the second-longest of any in the index's three-year history. 

While OTRI has fallen 5% off the Labor Day peak, it remains at a remarkably high level at 25.47%. This indicates that nearly one in four loads is still being rejected at contracted rates across the country. Rejection rates in three of the six largest freight markets are outpacing the national average. Although rejection rates have slowed since Labor Day, carriers are still rejecting more than enough contracted freight to keep spot rates high. 

Demand is simply outstripping capacity right now, and nothing points to that changing anytime soon. Accepted tenders remain at a historically high level, and carriers are exercising their options in searching for the highest rates and best loads. In doing so, carriers are being selective — accepting three of every four tenders. 

SONAR: OTRI.USA (2020 – Blue; 2019 – Green; 2018 – Orange)

Spot rates: Absolute levels positive for carriers, momentum neutral

For the first time since the bottom in late April, national spot rates have declined week-over-week. Spot rates followed the slowing tender rejection rates over the previous two weeks and fell 4 cents a mile to $2.91 a mile, inclusive of fuel. Of the 100 lane pairings from Truckstop.com in SONAR, spot rates declined this week in 65, but in only one by more than 10%. 

SONAR: TSTOPVR

On a national level, rates are still up 28% year-over-year, no change from last week. Rates have been positive on a yearly basis since mid-June but have recently accelerated as carriers have been rejecting tenders at 20%-plus rates. The yearly comps do not get tougher until the typical holiday peak season beginning in November. Until then, we expect to see spot rates running 20%-25% up year-over-year. 

SONAR: TSTOPVR.USA (2020 – Blue; 2019 – Green)

Economic stats: Momentum and absolute level neutral

Several economic releases this week are worth noting.

Weekly jobless claims were released Thursday and give us one of the best close-to-real-time indicators of the overall economy.

This week's jobs news disappointed relative to the improved momentum and change in tone we have seen in recent weeks and months. Initial jobless claims came in at 870,000 last week, which was worse than consensus expectations of 850,000 and ends the multiweek downward trend. This week's 870,000 claims are up from last week's 860,000, but the four-week moving average continues to trend lower. Jobless claims have now fallen in 21 of the past 26 weeks dating back to the peak weekly jobless claims number from late March. On the positive side, continuing claims (a rough proxy for unemployment) fell by more than 167,000 to 12.6 million. 

Initial jobless claims (weekly in 2020)

Source: CNBC, U.S. Department of Labor

Turning to consumer spending as measured by Bank of America weekly card (both debit and credit) spending data, total card spending in the latest week was up 1.1% year-over-year. This is slightly above the recent flattish range and well off the ~40% declines from late March and early April. As we usually note, keep in mind there is a beneficial mix shift from cash to debit ongoing that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 8% year-over-year and far outpacing credit card spending, which is down 7% year-over-year.

The main takeaways this week are that despite the expiration of the enhanced unemployment benefits back on July 31, spending trends for the lower-income population are actually outpacing those of the higher-income population and growing in the double digits year-over-year. Spending in the higher-income cohort is more flattish year-over-year.

By category, online electronics (up 48% year-over-year this week) and online retail (up 57%) continue to be the standout performers. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker categories, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually.

Grocery is running up 10% year-over-year. Restaurant and bar spending has staged a huge comeback and is now down just 10% year-over-year. Brick-and-mortar retail spending has improved dramatically as most states reopen and was -4% year-over-year this week. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but lodging is way up off the bottom and appears to have gained momentum in recent weeks. Airlines and entertainment are now declining about 70% year-over-year compared to the trough of down 90%-100% in early April.

Card spending by American consumers has a strong correlation with truckload volumes, so we will continue to monitor this data closely going forward.

Source: Bank of America Merrill Lynch

Transportation stock indices: Absolute levels and momentum positive for carriers

It was a rough week for our transportation indices following mostly strong weeks over the past couple of months. LTL and parcels were the best performers at -0.7%, and logistics was the worst performer at -2.2% this week.

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.

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