One Last Leg Up Before The New Year?

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: 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.

Outbound tenders have declined materially since Thanksgiving. Trucking capacity has become easier to secure, yet spot rates inched higher over the past week. We believe retailer replenishment strategy could be slowing the freight demand. All being said, we still believe the market can take one last leg up into the new year. 

The Pricing Power Index is based on the following indicators:

Load volumes: Absolute levels positive for carriers, momentum neutral

The Outbound Tender Volume Index has normalized after its holiday disruption and now sits at 15,266. OTVI has taken a typical seasonal path downward, falling nearly 11% since Turkey Day. This is a more pronounced decline than in the previous two years, but volumes are at such an extraordinary level, this is not concerning. 

There is a strong pipeline of West Coast imports that should feed those markets well into Q1, but the retail portions will be less time-sensitive post-Christmas. The one factor that may be suppressing volumes in the holiday season is retailers' decision to slow the velocity of their sales in the face of low inventory levels. Many retailers, including Gap and Macy's, did not offer the same number of customarily steep Black Friday in-store discounts.

I wrote about this in depth in a recent Point of Sale newsletter (read here). With inventory levels already low, retailers calculated that they could afford to slow down sales and maximize profitability. That may turn out to tamp down freight demand over the next couple of weeks. 

Want retail supply chain insights twice weekly? Try Point of Sale. 

We don't think slower, more prolonged holiday sales are necessarily a negative for carriers. Ultimately, the duration and sustainability of the current high-volume, high-rate environment is much more important. 

Truckstop.com spot volume data has been noisy over the past week. Due to the Thanksgiving holiday, volumes have snapped back across almost every lane in SONAR. 

SONAR: TSTOPVV

Although there are some "warning signs flashing yellow," according to the Passport Research Team, 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 – Orange; 2018 – Green)

Tender rejections: Absolute levels positive for carriers, momentum positive for shippers

Truckload capacity has become easier to secure over the past two weeks, according to the Outbound Tender Reject Index and our conversations with brokers. Since peaking above 28% on Black Friday, OTRI has fallen 12% to 24.29%, its lowest reading since Nov. 1. 

Friday breaks a 36-day streak of OTRI holding above 25%. This was by far the longest period above that level since the inception in early 2018. OTRI has remained above 20% for 130 days. 

Tender rejections and spot rates still have another two weeks to accelerate before the holiday, and we think it's a fair bet that they do. Early next week is when we begin seeing carriers implementing widespread bracketing, or limiting drivers' range to keep them closer to home. 

SONAR: OTVI.USA (Blue); ROTVI.USA (Purple) 

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 15% 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, 15 vessels were still 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 upward pressure on rejection rates. 

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

Spot rates: Absolute levels and momentum positive for carriers

Last week, the national spot rate average cracked $3/mile for the first time all year, inclusive of fuel. The Truckstop.com national dry van average inched up another 2 cents this week, to $3.07/mi. The move itself is inconsequential, but does notch another year-to-date high. The move higher comes as tender rejections take leg down to its lowest level in six weeks. 

Of the 100 Truckstop.com spot rate lane pairings in SONAR, 52 were positive week-over-week. 

Broadly speaking, rates out of Southern California fell last week, while rates in the Midwest, particularly outbound from Chicago, rose sharply. Rates on the Chicago to Baltimore lane (pink line above) surged 5.5% last week to $3.98/mile, the second week in a row of strong gains. Meanwhile, Los Angeles to Dallas fell 4.6% to $2.86/mile, taking the lane back to a rate equivalent to the second week of August, much earlier in the trucking rally. 

SONAR: TSTOPVR

It is interesting to see spot rates climb higher in a week when capacity loosened in many regions of the country. 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 domiciles 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 rose this week and came in well above consensus expectations. Jobless claims were 853,000, which widely missed the consensus of 730,000. This is modestly negative news as it represents a multi-week downturn in claims. Furthermore, there was more bad news in the form of continuing claims (a rough proxy for unemployment), which rose this week by 230,000 to 5.8 million. This was the first weekly jump in continuing claims since late August The unemployment rate fell to 6.7% in November from 6.9% in October, which is positive but the rate of change to the downside has slowed as coronavirus cases spike again.

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 5.4%  year-over-year. The picture is brighter when focusing on retail spending excluding auto. Retail spending (excluding auto) was up 9.8% 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 13% year-over-year and far outpacing credit card spending, which was down 3%  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 consumer spending accelerated to the upside this week (to 5.4% year-over-year from -1.0% last week). Holiday promotions are leading to some volatility in week-to-week growth but the general upward trend is intact. Second, on a cumulative basis between Nov. 1 and Dec. 5, holiday sales are up a robust 19% year-over-year. Lastly, the great news is that spending in COVID hot spots in the U.S. is no longer showing any meaningful negative divergence.

By category, online electronics (up 56% year-over-year this week) and online retail (up 44%) continue to be the standout performers. However, the former two categories have slowed meaningfully from their monthslong blistering pace but have settled in at a high level. 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 up 13% year-over-year this week, extending the winning streak we have seen 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 12% 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. 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. Logistics was the best performer this week at 4.5%, while LTL was the worst performer at -4.0%.

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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