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Flat Volumes Plus Loosening Capacity Equals More Power For Shippers

This week's DHL Supply Chain Pricing Power Index: 35 (Shippers) Last week's DHL Supply Chain Pricing Power Index: 40 (Shippers)

Benzinga · 01/23/2020 22:00

This week's DHL Supply Chain Pricing Power Index: 35 (Shippers)

Last week's DHL Supply Chain Pricing Power Index: 40 (Shippers)

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

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.

This week, strong economic data including consumer sentiment, retail sales and housing data bolster pricing power on the carrier side. But muted volumes, falling rejections and tumbling spot rates tell us the shippers ultimately gain pricing power this week. 

The Pricing Power Index is based on the following indicators:

Load Volumes: Momentum And Trend Neutral

The Outbound Tender Volume Index (OTVI.USA) has stayed horizontal below its March 2018 starting point of 10,000 since it recovered from its New Year's trough. 

The index currently sits at 9,360.73, which is slightly below its yearly comparable by less than 1%. 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, but they had been slightly up in the low single-digit range for the last two weeks. A different story is visible when analyzing reefer volumes. Outbound reefer volumes are up nearly 15% year-over-year due in part to particularly cold weather in the Midwest. It may seem counterintuitive for reefer volumes to soar in cold weather, but reefer trailers are used to keep freight from freezing in the winter. 

FreightWaves recently has introduced a data set to enable interpretation of reefer volumes and reefer rejections: FREEZE. The FREEZE data set gives average daily temperatures by county in the contiguous United States. Utilizing FREEZE, we've seen many instances in the past two weeks when temperatures fell below freezing and reefer volumes increased in tandem with reefer rejections. With warmer weather on the way, we will monitor whether reefer volumes fall and what the impact to van volumes will be.

SONAR: ROTVI.USA(Green – 2018-19; Blue – 2019-20)

Tender rejections: Absolute levels neutral, momentum positive for shippers

After peaking at 14.25% on Christmas Day, the Outbound Tender Reject Index (OTRI) has slipped to 7.4%. This is three straight weeks of declining tender rejections off the peak. The index has seemingly stabilized at a higher level seen in most of 2019. This is due in part to the cold weather and thus higher reefer rejection rates. OTRI is an amalgamation of all Class 8 modes — van, reefer and flatbed. Van makes up the largest portion, but elevated reefer rejections have helped hold OTRI above 2019 levels. 

Reefer rejections have begun to tumble over the last week due to warmer than average temperatures across the Midwest. Looking ahead, weather across the U.S. is forecast to warm over the next few days. We expect reefer rejections to continue to fall and drag down OTRI on the way down for the next week. 

SONAR: OTRI.USA; ROTRI.USA(White – OTRI; Green ROTRI)

Spot rates: Absolute level positive for shippers, momentum neutral

Spot rates have tumbled from Christmas highs of $1.62/mile to a current $1.48/mile. Spot rates are down $.03/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 recurring seasonal tear, increasing 15% over the last eight weeks of the year. But as we have written for the two weeks, the January blues are in full session and we don't expect any band up in spot rates in the coming weeks.

SONAR: DATVF.VNU

Economic stats: Momentum and absolute level positive for carriers

The preliminary reading for January in the University of Michigan Consumer Sentiment Index came in at 99.1, which missed consensus expectations of 99.6 and was down from 99.3 in the prior month. While on the surface this sounds negative, 99.1 is still an extraordinarily strong reading (generally any reading above 90 is considered very good) and the previous month notched a seven-month high. The index has spiked significantly higher since the fall of last year and has been able to hold the elevated levels bolstered by an all-time high in stock prices, a 50-year low in the unemployment rate (UEMP.USA) and wage gains that are outpacing inflation (CPI.ALL).

In addition, last week the National Retail Federation reported that holiday retail sales (RESL.USA) rose 4.1%, a very healthy level and in line with its expectation of 3.8-4.2%. Online spending (RESL.ONLN) also rose a robust 14.6% y/y.

All of the past week's strong consumer economic data comes on the heels of the best monthly reading in housing starts (HOUS.USA) in 13 years. Housing starts surged 16.9% m/m in December to an annual rate of 1.608 million and blew away consensus expectations. This level of housing starts will require a great deal of building supplies and new furniture to stock the new houses. These reports suggest a solid backdrop for freight volumes (OTVI.USA) and a possible firming in spot rates (DATVF.VNU) heading into summer peak season if the momentum continues.

SONAR: HOUS.USA, RESL.USA

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

All of the FreightWaves transportation stock indexes (aside from logistics) took a step back this week after a torrid rise last week, giving back some of the gains.

Our logistics index led the way this past week, up 3.2%, again driven primarily by XPO Logistics, which announced the exploration of strategic alternatives last week — including the possible sale of its freight brokerage, last-mile and European businesses. As a result, XPO's stock is up 15% on a trailing one-week basis.

Our LTL index fell -0.9% this past week but was the second-best performing index even though all four constituent stocks fell. Our parcel index fell -1.1% this past week driven primarily by FedEx (FDX), which declined 4.0%. Finally, our truckload index rounded out the bottom, falling 3% this week (after rising 4% last week). 

Year-to-date, transportation stocks as measured by the Dow Jones Transportation Average (DJTA) have risen 0.9% compared to 2.7% for the S&P 500 (SPX).

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.

Check out the newest episodes of our podcast Great Quarter, Guys titled "Is this the end of XPO as we know it?" here.

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