Freight Bull Market Rages On In The New Year

This week's DHL Supply Chain Pricing Power Index: 70 (Carriers)

Last week's DHL Supply Chain Pricing Power Index: 70 (Carriers)

Three-month DHL Supply Chain Pricing Power Index Outlook: 75 (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.

The Outbound Tender Volume Index is still distorted from the holiday drop-off, but at trough remains 13% above 2020 levels on a rejection-adjusted basis. Relative capacity has loosened this week as drivers returned to the roads after the holiday break. The stage is set for a historically strong Q1 for freight with a slow vaccine rollout keeping a lid on services spending, and consumers are flush with recent stimulus as well as the hopes for more to come. The freight bull market rages on to start 2021. 

The Pricing Power Index is based on the following indicators:

Load volumes: Absolute levels positive for carriers, momentum neutral

Due to its calculation and presentation as a seven-day moving average, OTVI remains distorted by the New Year's holiday. However, even in its trough, we can compare year-over-year (yoy) growth. OTVI sits 27% above January 2020 levels on a non-rejection-adjusted basis. When adjusting for the exorbitantly high tender rejection level (by multiplying OTVI by the inverse of OTRI), contracted tenders are up 13% yoy. Not a bad place to be at the beginning of the typically slow season. 

And this year will not see the typically slow season. In fact, with the passing of the second stimulus, the potential for a third stimulus and the slow rollout of the nation's vaccine program, the beginning of 2021 shouldn't lose any steam soon. Not only does the consumer backdrop remain strong with stimulus and a savings rate double the five-year average, but the industrial recovery is beginning to bloom. 

Amit Mehrotra, managing director and head of transportation and shipping research at Deutsche Bank, said his 2021 transportation outlook is the most bullish he's written in his 20-plus years covering the space. He believes both the industrial and consumer economies will be "firing on all cylinders this year." Mehrotra notes a sharp rebound in auto and aerospace production as well as demand growth for refined oil products will drive the industrial segment to growth this year. 

/SONAR: TBIS.USA

There is also the inventory restocking thesis that will play out during the first half of the year. Total inventory-to-sales ratio is at its lowest point since 2014, and the restocking of inventories that were depleted and often not restocked due to supply chain disruptions or management SKU selections will be another driver of demand. 

With the consumer still stuck at home for the foreseeable future and flush with stimulus money and the hopes of more on the way, Q1 should be one of the stronger first quarters in history from a consumer and freight volume standpoint. 

SONAR: OTVI.USA (2020/21 – Blue; 2020 – Orange; 2019 – Green)

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

The holiday break is over and done, and drivers have reentered the market. This is evidenced by declining rejection rates on flat volume. Tender rejections are following a seasonal pattern downward after the holidays, albeit at a much higher level. Currently, the Outbound Tender Reject Index sits at 23.39%, its lowest level since mid-August just before the last leg up in volumes. OTRI has fallen steadily since the Christmas holiday when it peaked at 28.5%. We had suspected OTRI may push through previous all-time highs and possibly reach 30%, but it never quite made it. 

Although relative capacity has been loosening through the first week of the year, securing trucks is still historically difficult. Carriers are rejecting nearly one in four tenders at contracted rates. 

From a geographic perspective, the Midwest and Plains regions are experiencing the tightest capacity for both dry van and reefer markets. The West Coast, which has been and continues to be flooded with imports, is at its loosest relative capacity level since August, with Los Angeles and Ontario, California, both hovering around 18.5% rejection rates. 

SONAR: MAPS

Reefer capacity remains the most difficult to secure with a national tender rejection rate of 42%. Similar to dry van and exacerbated by the cold weather, the Midwest and Plains are posting the highest reefer rejection rates, with most markets north of 55%. 

Tender lead times were the longest in all of 2020 on Dec. 27 as OTLT.USA reached 3.522 days. As capacity has been added back to the system since then, shippers have begun showing signs of confidence and lowering lead times. In the 10 days since the peak, lead times have declined more than 15%. That said, OTLT.USA is still 7% above last year's average. 

Over the course of the next few weeks, we expect tender rejections to remain stable or fall slightly as new contract rates come in closer to spot rates. Due to various supply constraints such as the Drug and Alcohol Clearinghouse, the lack of CDL issuances in 2020, and the lasting supply constraints at driver training schools, capacity will remain elevated compared to previous years. Unless consumer spending falters and the industrial economy slows significantly, which we think is highly unlikely, there will be more than enough demand to keep tender rejections well above typical Q1 levels. 

SONAR: OTRI.USA (2020/21 – Blue; 2020 – Orange; 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.

Jobless claims rose this week and came in below consensus expectations. The negative multiweek trend remains intact as the four-week moving average rose 17,750 to 836,750, but this week brought a welcome break. Jobless claims were 787,000, which beat the consensus of 815,000, and down slightly from 790,000 last week. There was more positive news in the form of continuing claims (a rough proxy for unemployment), which fell this week by 126,000 to 5.1 million. The unemployment rate fell to 6.7% in November from 6.9% in October, which is good news, but the rate of change to the downside has slowed as coronavirus cases spike again and the jobless rate may rise in December. On the latter, the consensus is expecting the jobless rate in December to climb slightly to 6.8%.

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 available was up 2.2% yoy. The picture is less optimistic when focusing on retail spending excluding auto, which is a recent change in trend. Retail spending (excluding auto) was up 0.9% 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, looking back at the full year of 2020 card spending data in review, durable goods (good for trucking) were the massive winner while travel was the worst loser (no surprise here). Second, Bank of America's estimate for the cumulative holiday spending in 2020 ended up finishing just slightly below 2019, a modestly disappointing result with spending falling off after Black Friday this year as consumers shopped earlier more often. Lastly, December core retail sales (excluding autos, gasoline, restaurants and building materials) are estimated to be down 1.2% month-over-month on a seasonally adjusted basis, representing the third straight month of declines — a clear negative trend. However, we expect this trend will reverse as stimulus checks reach consumers and consumer spending accelerates.

By category, online electronics (up 70% year-over-year this week) and online retail (up 63%) 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. We would note, however, that we expect a near-complete reversal and decisive change in terms of the winning and losing categories from a year-over-year growth perspective once a large number of Americans are vaccinated, likely sometime in the second or third quarter of 2021.

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. As mentioned, restaurant and bar spending had staged a huge comeback but is now exhibiting worrisome signs, dropping 22% year-over-year (a multimonth low). This trend is showing a 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. 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

On the whole, it was an incredible week for our transportation indexes except for Parcels. Truckload was the best performer this week at 5.7%, while Parcels was the worst performer at -5.7%.

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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