Volumes surged, capacity snapped back and spot rates responded in kind — power shift to the carriers

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

Last week’s DHL Supply Chain Pricing Power Index: 20 (Shippers)

Three-month DHL Supply Chain Pricing Power Index Outlook: 55 (Carriers)

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.

National outbound tender volumes had its biggest weekly gain by a factor of 2.5 this week. Concurrently, dry van capacity snapped back 10% after the outbound tender volume index loosened more than 6% last week. Also, FreightWaves’ recently announced partnership with Truckstop.com allows us to get a much more granular look at spot rates, which for most lanes increased this week.

The Pricing Power Index is based on the following indicators:

Load volumes: Momentum and trend neutral

National outbound tender volume surged over 6% in the past week. This week’s gains are more than double the second-largest weekly increase, which happened to be last week. The outbound tender volume index now sits well above both the 2018 and 2019 comparisons at 10,482.24. This is the first time OTVI has been above its March 2018 starting point of 10,000 since before Christmas.

Last week, we predicted a low-single-digit volume increase because of the “March bump” exhibited in the past two years of data. While this has come true, it may not be long lived. OTVI is already at the highest point it has been in any of the past three Marches. The possibility of widespread quarantines due to the coronavirus is the most threatening deterrent to the current volume momentum.

Reefer volumes have ticked up over the past week, but the majority of this upswing is from increasing dry van volumes. Our outlook for volumes for the remainder of the first quarter is blurred by the effects of the coronavirus on global trade flows. China is reporting that 60-70% of capacity is currently back in production, but other datasets tell a vastly different story. Until we get more viable evidence from outside of Beijing, it is difficult to forecast the full impact to U.S. truckload volumes in the short term.

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

Tender rejections: Absolute levels positive for shippers, momentum neutral

Tender rejections snapped back more than 10% after falling 6% last week. Despite a strong weekly gain for the carriers, the overall level (5.83%) is still extremely low. This week’s change in OTRI is entirely due to tightening dry van capacity. Reefer capacity tightened slightly over the past week with ROTRI.USA down nearly 3%. 

Capacity is still extremely loose and it will most likely stay this way for the next few weeks. The coronavirus has not yet impacted American truckload capacity, but it is likely to do so in the near future.

SONAR: ROTRI.USA (Blue — 2020; Green — 2019)

Spot rates: Absolute level positive for shippers, momentum positive for carriers

On Thursday, FreightWaves announced a new data partnership with Truckstop.com to provide SONAR users with spot trucking rates and volumes. Effective immediately, FreightWaves SONAR clients will have access to Truckstop.com rate assessments in 100 of the largest truckload lanes. From here on, we will utilize this rich dataset to discuss spot rates. This data has a much shorter lag as it is reported weekly. For example, we have spot rate data for March 1 on March 5.

The rates are presented as an all-in rate, but we will report them here on a per-mile basis.


SOURCE: FreightWaves analysis of Truckstop.com data 

Because DATVF.VNU is on a 10- to 15-day lag, we will not see the impact of the changes in volume and capacity for another couple weeks. With the new Truckstop.com data, it can be seen, at least anecdotally using some of the densest lanes in America, that spot rates have ticked up in the past week. If the simultaneous momentum of increasing volume and tightening capacity continues, the next few weeks will be brighter for carriers.

We still believe once the freight impacts from the coronavirus have been worked through, spot rates are in a position to move up significantly when that freight hits U.S. coasts. But, with the number of sailings currently being canceled or running mostly empty, it could be months before imports from China normalize.

Economic stats: Momentum and absolute level neutral

The Federal Reserve announced an emergency 50 basis points (bps) rate cut on Tuesday, lowering its target Fed Funds range to 1-1.25% from 1.5-1.75% previously. The Fed did so in a reaction to the rising economic risk posed by the coronavirus becoming a global pandemic and the knock-on effects to global supply chains and consumer spending. This marked the first emergency rate cut between Fed meetings since the Great Recession in 2008. The Federal Open Market Committee (FOMC) unanimously voted to lower rates. Fed Chairman Jerome Powell noted, “For us what really matters is not the epidemiology but the risk to the economy. So we saw a risk to the economy and chose to act.” The Fed chose to respond to a re-inverted yield curve that had emerged prior to their decision to act as inverted yield curves are one of the best recessionary indicators historically.

The effect on the real economy from the latest rate cut is debatable given the difficulty in fighting a spreading virus with monetary policy. However, the most direct and immediate effect of the rate cut is likely to be a boon to housing via lower mortgage rates, both through refinancings and new home purchases. It should also indirectly boost consumer sentiment and confidence, at least in the near term.This could positively affect flatbed outbound tender volumes (FOTVI.USA) and tender rejects (FOTRI.USA) in coming months.


Also, as financial markets are violently whipsawed each day as more and more negative coronavirus news spreads, the 10 Year U.S. Treasury bond yield has hit an all-time low and even fell below 1% this week as bond market investors appear to be discounting the worst and forecasting a very high probability of an imminent U.S. recession (at least a shallow recession for a quarter or two). With the 10 year yielding about 1%, real yields (after inflation) are now negative, or alternatively, the bond market is betting on deflation. Both a recession and deflation would be very negative developments for the transportation sector. It is far too early to make that call, but we will be watching closely for any spillover from a weakening real economy into trucking rates.


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

After last week’s bloodbath, this week’s losses pale in comparison but all our transportation indices were still down. Less-than-truckload (LTL) led the way on the downside, dropping 2.5%. Logistics was the second-worst performer, with a 2.4% drop, followed by truckload at -1.2% and parcel at -0.5%. All four transportation indices significantly underperformed the S&P 500, which was actually up 2.2% this week.

We think the underperformance likely stems from transportation’s greater downside exposure to weakening global economic growth and supply chain disruptions from the coronavirus. The market appears to be discounting the likelihood that both volumes and rates will be negatively impacted if and when the virus spreads into a pandemic in the U.S.

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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