Excess capacity keeps rates depressed on flat volumes

This week’s DHL Supply Chain Pricing Power Index: 25 (Shippers)

Last week’s DHL Supply Chain Pricing Power Index: 25 (Shippers)

Three-month DHL Supply Chain Pricing Power Index Outlook: 45 (Shippers)

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

Not much meaningful movement in any of the components this week. National tender volumes, rejections and rates all moved less than 1% weak-over-week. Capacity remains loose and rates are depressed on almost identical truckload volumes as 2019.

The Pricing Power Index is based on the following indicators:

Load volumes: Momentum and trend neutral

Much like the S&P 500, the Outbound Tender Volume Index (OTVI.USA) has not increased or decreased more than 1% in any week besides the MLK holiday week.

The index currently sits at 9,601.86, which is slightly above its yearly comparable by less than 1%. National volumes have risen 11 bps since our reporting last week. At this point in the year, it is important to dissect our Outbound Tender Volume Index into its two largest components: van and reefer volumes.

Van volumes in 2020 are almost identical to 2019 at this point (up 0.8%), but they had been slightly up in the low-single-digit range for the past month. A different story is visible when analyzing reefer volumes. Reefer volumes had been up in double digits on a yearly basis for all of January but decreased significantly from the end of January through last week. Cold weather developments across the Midwest and Western states have caused reefer volumes to pick up modestly (5%) since last week’s publication.

SONAR: VOTVI.USA; ROTVI.USA (White — Van; Green — Reefer) 

Tender rejections: Absolute levels and momentum positive for shippers

After peaking at 14.25% on Christmas Day, the Outbound Tender Reject Index (OTRI) has slipped to 5.59%. This week marks the first week since before Christmas that tender rejections increased. However, the increase is marginal (1.39%) and shouldn’t be seen as a tightening capacity environment. This increase is mostly derived from an increased demand for reefer capacity due to wintry weather in many regions of the country over the past week.

SONAR: ROTRI.USA; VOTRI.USA (White — Reefer; Orange — Van)

Spot rates: Absolute level positive for shippers, momentum neutral

Spot rates have tumbled from Christmas highs of $1.62 per mile to a current $1.37 per mile. Spot rates have now fallen for the past six weeks since holiday highs totaling a decline of 15%. Spot rates are down slightly (66 bps) per mile since last week. It seems the DAT freight rate (DATVF.VNU) has peaked, at least for the next few weeks. Spot rates ended the year on a seasonal tear, increasing 15% over the last eight weeks of the year. But as we have written for the past several weeks, the January blues are in full session and we don’t expect any snapback in spot rates in the coming weeks.


Economic stats: Momentum and absolute level neutral

U.S. consumer prices (CPI.ALL) increased by 0.1% in January, or 2.5% higher than last year, marking the largest increase since October 2018. This was slightly below economists’ consensus projection of 0.2% but does suggest that inflation is accelerating. This is important because the Federal Reserve has recently signaled that it is on hold for the foreseeable future in terms of the Fed Funds rate (FEDFUND.USA), with futures market even showing about a 40% chance of an interest rate cut sometime in 2020. If inflation continues to accelerate and remains above the Fed’s 2% inflation target, this risks pushing the Federal Reserve into an unexpected hiking cycle that could cause a premature end to the longest business cycle expansion in U.S. history.

For the freight markets to recover and spot (DATVF.VNU) and contract (PPI.LDTL) rates to turn positive in the back half of 2020 as we expect, inflation needs to remain subdued. Lower interest rates make borrowing cheaper for consumers and businesses, and thus drive continued increases in retail (RESL.USA) and capital spending. This ultimately leads to more freight flows and volumes (OTVI.USA). An accommodative Fed and lower interest rates have also helped the stock market rally in addition to buoying consumer confidence, which are all positives for freight and particularly dry van.


Transportation stock indices: Absolute levels positive for shippers, momentum positive for carriers

All of our FreightWaves publicly traded stock indexes (e.g. Logistics) finished the week on a positive note, with LTL leading the way at 1.4%, followed by parcel (1.3%) and truckload (0.8%). Logistics finished the week down but only modestly so (-0.3%).

Earnings were relatively quiet after a host of reports over the past several weeks. However, XPO Logistics (XPO) reported better-than-expected earnings and issued solid guidance for 2020. XPO also signaled progress on its recent announcement that it is open to selling or spinning off its non-LTL businesses with the hiring of new CFO David Wyshner. Wyshner, previously of Wyndham Hotels and Resorts and Avis Budget group, is a noted expert in such matters.

The big news this week came from the Stifel Nicholas transportation conference in Miami, where several trucking executives sounded a more optimistic tone on the outlook for the trucking market in 2020.

Notably, Werner CEO Derek Leathers said the backdrop for retailers, who provide roughly half of the company’s revenue, has been “pretty bullish.”  U.S. Xpress CEO Eric Fuller noted the typical peak season dropoff has not been as severe as usual and that things were a little better.

All of the truckload CEOs were bullish on the outlook for rates in the back half of 2020 as excess capacity wanes due to last year’s very depressed Class 8 truck orders, ELDs, the Drug & Alcohol Clearinghouse, and robust insurance inflation from nuclear verdicts.

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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