Carriers Flexing Pricing Power On The East Coast

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

Three-month DHL Supply Chain Pricing Power Index Outlook: 70 (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.

Black Friday and Cyber Monday are stark examples of this year's consumer — in-store traffic cratered more than 50%, but e-commerce spending notched Black Friday and Cyber Monday as the No. 3 and No. 1 largest online spending days in American history, respectively. Due to the calculation of the Outbound Tender Volume Index, weekly comparisons are near meaningless. Tender rejections have declined from the all-time highs on Friday, but remain above 25% and spot rates cracked $3/mile on a national average. 

The Pricing Power Index is based on the following indicators:

Load volumes: Absolute levels and momentum positive for carriers 

The Outbound Tender Volume Index is calculated and presented on a seven-day moving average basis. As such, OTVI becomes distorted in the week following national holidays. For that reason, weekly comparisons don't glean much meaningful insight. We can, however, compare the depth of this year's trough to previous years. This year, the decline was slightly more shallow than the previous two years, which leads me to believe volumes will snap back with strength when the index normalizes. 

The truckload market has been driven by the consumer in 2020. This holiday season has been much different than years past. On Black Friday, the biggest in-store shopping holiday of the year, foot traffic was down 52% yoy, according to Sensormatic Solutions. On the other hand, online demand surged to all-time spending highs for both Black Friday and Cyber Monday. 

On Thursday, the U.S. lost more than 2,800 people to COVID-19. We are also experiencing record-high hospitalizations and new daily infections. Indeed, multiple vaccines are within weeks of implementation, but this will be limited. And vaccine companies are already noting supply chain troubles and delaying their inoculation projections. 

So the high COVID infection rates and scarcity of the vaccine implies the distorted consumer behavior that has driven the freight markets will continue — goods spending will be elevated and services spending depressed. The accelerated rollout of multiple vaccines may normalize those patterns sooner than later, but we expect that effect to begin taking hold in Q2. That implies sustained, monthslong shifts in retail supply chains that de-emphasize truckload moves from DCs to brick-and-mortar locations and place a new importance on facility efficiency and throughput at distribution and fulfillment centers, wherever those may be located in the supply chain. 

For in-depth weekly analysis of the retail supply chain, subscribe to Point of Sale: https://web.freightwaves.com/point-of-sale

In the heat of peak holiday season, our thesis is largely the same: relatively tight capacity, strong volumes and positive cyclicality. The low inventory-to-sales ratio, strong consumer sentiment and spending, lack of service-based spending options and acceleration of e-commerce growth all bolster our belief. 

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

Tender rejections: Absolute levels and momentum positive for carriers

On Black Friday, the Outbound Tender Reject Index (OTRI) notched another all-time high for the series at 28.46%. Since then, OTRI has meaningfully declined by nearly 3% but remains extremely high at 25.82%. 

Rejection rates immediately after the holiday weekend are following a similar pattern to 2019 as rejection rates fell ~60 bps entering December before climbing higher through Christmas. In 2018, rejection rates following Thanksgiving collapsed nearly 200 bps and continued to slide through early December before turning up around two weeks before Christmas. 

SONAR: OTRI.USA (Blue); ROTRI.USA (Orange)

Relative capacity tightness continues to plague the reefer market as carriers are rejecting more than four in 10 electronic tenders. Reefer conditions have eased on a national level as rejection rates have fallen 181 bps after peaking on Nov. 22 at 49.17%, which is more than 1,900 bps higher than the initial surge in late March.

As of Monday, 20 vessels were anchored off the coast of Los Angeles and Long Beach, with an additional 16 expected by Friday. The OCEAN Alliance announced that vessel capacity from China to the U.S. West Coast, specifically to Los Angeles, will be increased by 17% through the end of December. Additionally, the 2M alliance (Maersk and MSC) along with ZIM will increase vessel capacity by 13% from China to the East Coast, with port calls in Houston, Mobile, Alabama, and Tampa, Florida. The increased throughput at the ports will keep pressure on truckload capacity for a prolonged period, keeping rejection rates elevated. 

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

Spot rates: Absolute levels and momentum positive for carriers

For the first time this year, the national spot rate average cracked $3/mile, inclusive of fuel. The Truckstop.com van rate per mile sits at $3.05, up 4.8% from the week prior. 

The Passport Research team highlighted the Atlanta to Philadelphia lane, which surged by 9.8% to $2.89/mile this week, indicating that carriers are still exercising pricing power on lanes to the East Coast. 

We expect another wave of tightening and higher rates going into Christmas, although demand may not look the same as in years past. Preliminary Black Friday/Cyber Monday sales data showed strong growth in e-commerce spending, but Black Friday in-store foot traffic dropped by more than 50% year-over-year. It's still unclear how much of the gap was due to consumers avoiding crowded stores and the fact that peak retail demand has been flattened and spread over a longer period. A soft Black Friday does not necessarily portend a soft holiday retail season, in our view, although it appears that brick-and-mortar brands without competitive online presences will lag their peers. 

Of the 100 Truckstop.com spot rate lane pairings in SONAR, all but 19 were positive week-over-week. The majority of those were lanes coming out of extremely hot markets like LA and Chicago. 

SONAR: TSTOPVR

In our view, further rate inflation in December is likely to come from the supply side of the market as driver preferences around home time and operating within a certain radius of their domicile constrain available trucking capacity. Winter weather may also play a small role if Northern population centers are subject to severe snowstorms. 

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

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.

Jobless claims fell this week and came in well below consensus expectations. Jobless claims were 712,000, which easily beat the consensus of 780,000. This is great news as it represents a post pandemic weekly low in jobless claim going all the way back to March 14, when COVID-19 first began to spread in the U.S. and jobless claims exploded. More good news came in the form of continuing claims (a rough proxy for unemployment), which fell sharply again this week, down by 569,000 to 5.5 million. The unemployment rate fell to 6.9% in October from 7.9% in September and we expect it to fall again when November numbers are released. 

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 down 1.0%  year-over-year. The picture is brighter when focusing on retail spending. Retail spending (excluding auto) was up 2.5% year-over-year last week. 

As we usually note, keep in mind there is an ongoing beneficial mix shift from cash to debit that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 3% year-over-year and far outpacing credit card spending, which was down 6%  After consistently running deeply negative for months and being down precipitously in April, credit card spending appears to have finally turned the corner.

The main takeaways this week are that spending fell to a year-over-year rate of -1.0% this week, a huge fall from 9.0% last week. This is due to the inherent volatility in holiday shopping and spending and we still believe the overall trend remains in the positive mid-single digits looking out over a multi-week trend. The biggest red flag this week was brick-and-mortar retail spending, which fell 14% year-over-year — a marked deceleration and the weakest reported number in months. Finally, spending in COVID hot spots in the U.S. continues to meaningfully underperform non-hot spots, though online retail spending growth is similar.

By category, online electronics (up 72% year-over-year this week) and online retail (up 59%) continue to be the standout performers. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker ones, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually.

Grocery was flat this week, down significantly from the recent run rate, which Bank of America believes is due to the smaller holiday gatherings this year for Thanksgiving. This week aside, recently we have seen a significant increase in the rate of grocery spend in recent weeks and months, which raises eyebrows as COVID cases reaccelerate. Restaurant and bar spending had staged a huge comeback but is now exhibiting worrisome signs, dropping 17% year-over-year; this trend is starting to slip for several weeks in a row and will be an important category to monitor going forward with COVID-19 cases skyrocketing globally. Brick-and-mortar retail spending, as discussed earlier, weakened dramatically but potentially more to a timing issue. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but all three categories are way up off the bottom and appear to have gained momentum in recent weeks. Airlines and entertainment are now declining about 60%-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 Securities

Transportation stock indices: Absolute levels and momentum positive for carriers

It was a mixed week for our transportation indexes following several strong months, though many transportation stocks are well off their highs. LTL was the best performer this week at 4.1%, while truckload was the worst performer at -0.9%. XPO again announced that it was breaking up the company and finished the week up 11%.

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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