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Carriers Grasping For Straws While Losing Ground

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This Week's DHL Supply Chain/FreightWaves Pricing Power Index: 15 (Shippers)

Last Week's DHL Supply Chain/FreightWaves Pricing Power Index: 20 (Shippers)

Three-Month DHL Supply Chain/FreightWaves Pricing Power Index Outlook: 40 (Shippers)

The trucking industry operates in a market based on real-time demand and supply. When demand is higher than capacity, carriers gain negotiating power for rates. When supply is higher than demand,  shippers have the advantage.

The DHL Supply Chain/FreightWaves 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. 

The Pricing Power Index is based on the following indicators:

Load Volumes: Momentum And Trend Neutral

The Outbound Tender Volume Index (OTVI.USA) is currently at 10,012.37, up nearly 5% since last week. The yearly comparison is slightly distorted due to the late Thanksgiving holiday this year. There is typically a surge just before the holiday as shippers and carriers alike rush to move freight before the holiday. Because Thanksgiving is a week later this year, this strong increase back above the 10,000 mark is muted by the 7.17% increase from the same week last year.

Nevertheless, this is the first time in three weeks the volume index has risen above its March 2018 starting point of 10,000. The index crossed its 60-day moving average yesterday and sits slightly above it. Despite this week-over-week surge in volumes, our holiday season outlook remains neutral. 

SONAR: OTVI.USA

Tender Rejections: Trend And Absolute Levels Positive For Shippers; Long-Term Trend Positive For Carriers

Outbound tender rejections rose significantly this week by 76 basis points from 5.54% to 6.28%. This is the highest level since early July and the first time the index has crossed the 6% threshold since mid-September. The 13.72% increase in the past week is higher than the pre-Thanksgiving rise last year of 12.76%. The two granularities behind our tender rejection index are van and reefer rejections. While both have steadily increased over the past two weeks, reefer capacity is much tighter. The Reefer Outbound Tender Reject Index (ROTRI) currently sits at 17.06%, up 189 bps week-over-week. Reefer rejections crossed over their 60-day moving average on Nov. 14 and have continued to climb. Van capacity is much looser but is trending upward. VOTRI is up 72 bps in the last seven days and is 20.42% above its 60-day moving average. 

SONAR: OTRI.USA

Spot Rates: Absolute Level And Momentum Positive For Shippers 

Spot rates continue to remain listless with little volatility. The DAT dry van national average dipped again slightly this week from $1.43 to $1.41 per mile. We still think this range is the trough for spot market rates as it is reflective of normal per-mile operating costs for carriers. That said, it can still remain at this lower band for the coming months based on capacity metrics from OTRI.USA and weakening demand indicators from the economy.

Contract Rates: Absolute Level And Momentum Positive For Shippers

Contract rates as measured by the Producer Price Index (PPI.LDTL) increased sequentially from September to October by 46 basis points. However, when viewing through a year-over-year lens, contract rates are down 2.85% from October 2018 levels. Compared with September's year-over-year PPI.LDTL drop of 2.5%, contract pricing appears to be dropping at an accelerating pace. 

We believe this trend in contract rates will continue as shippers rebid rates and/or move more freight onto the spot market. An early indicator for a deceleration in the downward movement of contract rates will be when spot rates climb 10% to 15% from its current position.     

Economic Stats: Positive Momentum For Carriers

The U.S. and China continue to be very close to reaching a "phase one" initial trade deal in which both sides have agreed to simultaneously cancel some existing tariffs imposed on each other. As a result, the S&P 500 continues to trade close to its recent new all-time high while 10-year U.S. Treasury bond yields have climbed significantly off the bottom seen in September. The markets appear to be prognosticating a rosier outlook for industrial production and global economic growth prospects, a distinct positive for carriers if manufacturing- and industrial-tied volumes can finally begin to improve heading into 2020.

View more earnings on TGT

On Nov. 20, Target Corporation (NYSE: TGT) beat earnings and raised guidance, sending its shares up 14%. Last week we talked about how Walmart Inc. (NYSE: WMT) did the same and it was a sign of the strength of the U.S. consumer.

This was the second quarter in a row that TGT has raised its outlook. Given Target is the eighth-largest retailer, accounting for roughly 2% of overall U.S. retail consumer spending (SONAR: RESL.USA) and has a mid- to higher-end customer base in comparison to WMT, this report sends broad positive read-throughs to both the economy and trucking. This is particularly true for peak season and is supportive of a more optimistic outlook to come if other retailers see similar shopping trends.

Target's U.S. same-store sales (SSS), the key metric that investors and Wall Street watch, grew 4.5% in the third quarter (far outpacing consensus of 3.6%). SSS grew nearly 10% on a two-year stack, which is extremely impressive.

Target's strength was broad-based, but its biggest winning category was apparel sales, which grew 10% as it takes share from department stores and specialty retail. Also, digital comparable sales growth surged 31% in the third quarter.

TGT's results have positive implications for U.S. general merchandise sales (SONAR: RESL.MRCH) and dry van tender volume growth (SONAR: VOTVIY.USA). 

With Walmart and Target together accounting for 12% of overall U.S. retail sales (SONAR: RESL.USA) and easily surpassing expectations, we now know that 12% of total U.S. retail sales are running up 4-5% y/y and exhibiting broad strength from the low end to the high end and from grocery to apparel.

SONAR Tickers: RESL.CCAS, STOCK.TGT

Third-quarter Transportation Earnings Highlights: Absolute Levels Positive For Shippers, Momentum Neutral

The market is sanguine on the transportation sector, even in the face of widespread disappointing third-quarter earnings. However, our proprietary truckload, less-than-truckload (LTL), logistics and parcel stock indices fell for the second week in a row by -3.4%, -2.8%, -1.8% and -2.9%, respectively. Industrials, as measured by the S&P 500 Industrial Sector SPDR ETF (Ticker: XLI), where freight and logistics represent roughly one-third of the ETF by weight, fell by -0.4% this week but are up by 5.8% (leading all 11 S&P 500 sectors) over the past month. Investors appear to be discounting an increasing likelihood of a global synchronized recovery in 2020 led by more economically sensitive and cyclical industries like trucking.

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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