Carriers Reigning Supreme This Peak Season

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

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

Three-month DHL Supply Chain Pricing Power Index Outlook: 65 (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.

Spot and contract volumes took legs up this week, while tender rejections briefly hit an all-time high before receding to just under 27%. We are in the teeth of the peak retail season, and carriers are in a position to have a record-setting quarter. Spot rates are running up 17% year-over-year, and the fundamentals remain strong. 

The Pricing Power Index is based on the following indicators:

Load volumes: Absolute levels and momentum positive for carriers 

We stated the past two weeks would stand out as a bellwether for the holiday season.  By all accounts, it's ringing songs of higher volumes and higher rates. Both the Outbound Tender Volume Index (OTVI), representing the contract market, and the spot volume indices from Truckstop.com took legs up this week. 

We expect strong holiday truckload and parcel demand on the back of a consumer spending portfolio that has been weighted heavily toward goods over services since the pandemic began. We believe that we are now in peak season and that shippers' requests for trucking capacity will continue to rise.

SONAR: TSTOPVVOL

A swath of recent economic data is giving us confidence in our outlook. 

Consumer confidence continued to climb in October, durable goods demand exceeded expectations in September and consumer spending notched a 1.9% growth rate in September. Even data out of the manufacturing sector exceeded expectations last week — the ISM manufacturing index came in at 59.3%, the highest value in two years. 

After running sideways for most of September and October, national tender volumes surged this week. On an accepted tender basis, volumes are now running up 30% year-over-year, rising from 24% last week. 

The one potentially major headwind forming is a brick-and-mortar spending decline in COVID hot spots. Whether this leads to a material decline in total consumption in these areas has yet to be seen. In either case, this is a trend both shippers and carriers should monitor closely as we move into the teeth of the holiday season. 

Source: Bank of America Merrill Lynch 

While consumption eventually shifted online and the freight markets benefited greatly from that move, it took some time. For weeks, freight volumes were flowing at national holiday-like levels. It's unlikely we will see any type of slowdown to that degree, but the threat must be noted. 

In all, we feel there are the necessary ingredients to keep the spot market strong through year-end: 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. 

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

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

Tender rejections: Absolute levels and momentum positive for carriers

Tender rejections fell from an all-time high this week. After peaking over 27% for the first time, the Outbound Tender Reject Index fell to 26.32%. This decline is marginal and nothing has fundamentally changed over the past few weeks. 

The markets all along the East Coast tightened this week, in part due to surging import volumes over the previous weeks. Capacity loosened slightly across Western markets, while Midwestern and Southwestern markets saw significant drops in tender rejections. 

SONAR: MAPS

At this stage in the cycle, we don't think there will be incremental capacity added to the trucking industry that will materially affect the market in 2020. While a record number of motor carrier authorities are being granted by the FMCSA, it's our view that these are primarily company fleet drivers who have chosen to go independent and leverage their earning power in a very hot market. The fact that enterprise carriers — from Schneider to Heartland Express and many more — are aggressively raising wages and sign-on bonuses for team and solo drivers tells us that the largest fleets are actually struggling to seat their trucks, much less grow their fleets. 

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

Spot rates: Absolute levels and momentum positive for carriers

As noted above, spot market activity heated up this week after a few weeks of sluggishness. More than 70% of spot volume lanes grew this week, and nearly the same number of lanes saw spot rate inflation. 

SONAR: TSTOPVR

National spot rate moves accompanied a rise in tender rejections, which briefly hit an all-time high before receding to its current level. While we don't necessarily think that tender rejections need to keep going up — or even stay this high — for spot rates to move even higher this peak season, the extraordinarily high rejection rate indicates that capacity is again slipping out of shippers' grasp. 

The yearly comps are becoming increasingly more difficult. In typical years, there is significant spot rate inflation during the peak season as shippers seek to stock shelves ahead of holiday spending. This year has not been typical in any way. Spot rates have been up 20%-25% year-over-year for months. However, we still should expect to see some seasonal upward pressure on spot rates in the coming weeks. 

On a national level, rates are still up 17% year-over-year, down from 21% 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. Despite the yearly comps getting tougher soon, we expect to see spot rates running up double digits on a yearly basis. 

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 sharply this week and came in well below consensus expectations. Jobless claims were 709,000, which easily beat the consensus of 740,000 and was down from 757,000 last week. The great news is that this week marked the lowest weekly jobless claim total 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 436,000 to 6.8 million. The unemployment rate fell to 6.9% in October from 7.9% in September. 

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 7.3%  year-over-year. The picture is even brighter when focusing on retail spending. Retail spending (excluding auto) was up 9.1% 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 is flat year-over-year. Interestingly, this is the first week in the past eight months since COVID-19 spread that we can recall credit card spending being flat or positive.

The main takeaways this week are the same as last week — despite the good news of accelerating spend, we are keeping a watchful eye as the virus is starting to impact brick-and-mortar retail spending negatively and restaurant and bar spending is slowing. COVID daily cases are spiking again dramatically in the U.S. and the 100 counties with the highest concentration of new COVID cases are seeing brick-and-mortar retail sales declines, as opposed to growth in the rest of the country. As for slowing restaurant spending, the colder weather may be a factor there as outdoor dining is the primary option for many restaurants. In addition, many states, such as Illinois, New York and California, have begun reimplementing curfews and closures of restaurants and bars.

By category, online electronics (up 62% year-over-year this week) and online retail (up 58%) 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 is still strong but well off the highs, running up 14% year-over-year. This is a significant acceleration from recent weeks, which raises eyebrows as COVID cases reaccelerate. Restaurant and bar spending has staged a huge comeback and is now down just 7% year-over-year; as discussed earlier, however, this is starting to slip and will be an important category to monitor going forward with COVID-19 cases skyrocketing globally. Brick-and-mortar retail spending has improved dramatically and was down 3% year-over-year this week. 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 Merrill Lynch

Transportation stock indices: Absolute levels and momentum positive for carriers

It was a mixed week for our transportation indexes following several strong months. Truckload was the best performer this week at 2%, while parcels was the worst at -4.5%. We believe the latter was driven by previous market perceptions of the parcels companies as beneficiaries of elevated e-commerce demand from COVID-19 changing abruptly this week in the wake of the Pfizer-BioNTech vaccine news.

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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