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Peak Holiday Season Brightened A Dismal Year For Carriers, But What Comes Next?

FreightWaves

This Week's DHL Supply Chain Pricing Power Index: 45 (Shippers)

Last Week's DHL Supply Chain Pricing Power Index: 45 (Shippers)

Three-month DHL Supply Chain Pricing Power Index Outlook: 50 (Balanced)

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 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 positive for carriers

The Outbound Tender Volume Index (OTVI.USA) is remaining above the tepid 2018 holiday season into the first week of a new decade. The overall level is currently 7,479.81, up 8.55% year-over-year. The strong holiday peak season strengthened pricing power for carriers for six straight weeks to end the year. Shippers felt the need to unload as much inventory as possible before the end of the year and were willing to pay elevated prices to those drivers willing to drive through the holidays. 

While we expect a typical soft January volume total, OTVI may remain above 2019 levels for the next few weeks due to the current spread between contract and spot prices. 

SONAR: OTVI.USA(Orange – 2018/19; White – 2019/20)

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

After peaking at 14.25% on Christmas Day, the Outbound Tender Reject Index (OTRI) has slipped to 11.03%. The fall was expected as drivers got their wheels turning again after spending time at home over the holidays. The index experienced a similar but more significant fall at the beginning of 2019, when the index was cut in half in a matter of four weeks. We expect a kindred acceleration to the downside in the coming weeks, but this past month's tighter capacity environment has given carriers life going into 2020. The OTRI is still near 2019 highs, although it will not last long. 

SONAR: OTRI.USA(Green – 2018/19; Blue – 2019/20)

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

Spot rates continued to climb through the holiday season, up nearly 5% over the past week. Since Nov. 1, DAT national dry van spot rates are up over 11% and now sit at $1.57/mile. It is important to note that the DAT national dry van spot rates lag tender rejections by 10 to 15 working days, so the data will likely go higher in the coming days. The absolute level of spot rates is depressed compared to the beginning of 2018 and 2019, but the peak holiday capacity and volume environment bolstered carriers' books. 

SONAR: DATVF.VNU (Orange – 2017/18; Green – 2018/19; Blue – 2019/20)

Economic stats: Neutral for both shippers and carriers

U.S. consumer confidence softened slightly in December and missed consensus expectations coming in at 126.5. This was down from 126.8 in November and fell short of economists' consensus of 128.2. This unexpected drop was the fourth in five months and the biggest weak spot was due to muted forward expectations of consumers. The drop in consumer expectations was centered around employment and income as the share of those seeing more jobs in the next six months dropped to the lowest level in a year and those expecting a decrease in income rose to the highest level in seven months. Consumers' assessment of current conditions actually improved. Overall, however, consumer confidence remains at very healthy absolute levels.

Consumer confidence is the backbone of consumer spending and therefore has critical implications for future retail spending growth (RESLG.USA) and the physical movement of goods by truck. If consumer confidence continues to wane as we move through 2020, it would have distinct negative implications for trucking volume growth (OTVIY.USA), which has been on an upward trajectory now for the last several months.

SONAR: RESLG.USA, OTVIY.USA

Also, the People's Bank of China just announced that it is injecting fresh liquidity into the banking system. China is looking to ease monetary conditions by reducing the required reserves that a bank must keep on hold at the central bank, thereby freeing up cash for lending.

In addition to the relaxation in trade war tensions, monetary easing in China should be a positive for Chinese internal economic growth, global trade and thus the overall movement of freight. China's most recent stimulus is a positive for carriers moving forward.

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

The FreightWaves transportation stock indices were mostly positive this week. Our logistics index led the way this past week, up 1% on the back of strong performance from XPO (XPO) and Echo Logistics (ECHO). Our LTL and truckload indexes performed well too, rising 0.8% and 0.7%, respectively, for the week, primarily due to strong performance from Knight-Swift (KNX) and Old Dominion Freight Lines (ODFL). Our parcel index, which led the way to the upside last week, was the only index to decline as it fell 0.4%. In general, transportation stocks have performed strongly over the last three months and are up double digits, though they have lagged the general market over the past year.

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 episode of our podcast Great Quarter, Guys here

Image by Jeff Chabot from Pixabay

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