Bank of America – Freight markets bounce back after sleepy mid-January

This week’s DHL Supply Chain Pricing Power Index: 70 (Carriers)

Last week’s DHL Supply Chain Pricing Power Index: 65 (Carriers)

Three-month DHL Supply Chain Pricing Power Index Outlook: 75 (Carriers)

The DHL Supply Chain Pricing Power Index uses the analytics and data 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: Absolute levels positive for carriers, momentum neutral

The Outbound Tender Volume Index (OTVI) fell 2.5% this week to 14,051. We must adjust for the level of rejected tenders accounted for in OTVI to get a clearer look at year-over-year comparisons. On a rejection-adjusted basis, volumes are up 21% yoy, a slight deceleration from last week’s 23% growth rate. 

The West Coast port markets that drove much of the freight volumes in the back half of 2020 heated up again this week. Los Angeles and Ontario, California, are two of the largest markets in the country and each saw volumes rise more than 7.5% over the past week. The rapid transition to e-commerce and stimulus-driven consumer demand has kept the Port of LA/Long Beach complex running at capacity for months now. The same goes for Georgia Ports. The Georgia Ports Authority (GPA) Executive Director Griff Lynch hasn’t seen a lull and doesn’t expect to. Shippers have front-run Lunar New Year, but sailings are not being canceled in normal fashion. 

Port markets on both coasts saw volumes pick up significantly this week. Savannah, Georgia, Elizabeth, New Jersey, New Orleans and the West Coast ports all picked up. 

The most recent Bank of America Special: COVID and the Consumer report included positive and interesting data on stimulus recipients marginal propensity to consumer (MPC). The MPC is an economic concept  that captures the amount of spending that comes from a source of income — in this case, stimulus checks. What the researchers found was the MPC of the second round of stimulus was much higher than the first — meaning recipients are spending the second round at a faster rate than the first in April. 

This is great news for freight volumes. While the vaccine rollout has picked up speed and America vaccinated 1.6 million people in a single day this week, the vast majority of the population remains unvaccinated and still unable to enjoy the normal range of services. With services still unavailable, it is safe to say the bulk of the stimulus included in the Bank of America data, is being spent on goods, further fueling the freight markets. 

Last week, industrial production data for December was released and surprised to the upside. With consumers continuing to spend (up 5.2% yoy this week), a blooming industrial recovery, a red-hot housing market and retailers with weeks, possibly months of inventory replenishment ahead, the foreseeable future for freight demand looks solid. 

SONAR: OTVI.USA (2020/21 – Blue; 2020 – Green; 2019 – Orange)

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

The Outbound Tender Reject Index (OTRI) has seemingly found a floor and has walked parallel to the x-axis, moving less than 2 percentage points over the past three weeks. OTRI descended from the all-time high on Christmas Day to 21.52% currently, and the rate of decline has decelerated meaningfully over the past two weeks. 

The decline was not due to an influx of capacity rushing in, nor a steep decline in demand. Rather, it was a factor of price. The falling rejection rates were primarily driven by improving routing guides with new contract prices. We may see further declines in OTRI over the coming weeks, but if demand remains high (which we believe is more than likely), OTRI will remain high versus historical averages until bottlenecks at driver training schools are remedied. 

The freight market is still incredibly tight, and capacity is not easy to source versus historical standards. Now that tight market is being rewarded with higher contract rates, which will continue to put downward pressure on both tender rejections and spot rates in the coming weeks. 

This doesn’t mean we should expect tender rejection rates to fall back near historical averages. Freight volumes remain up 20% yoy and do not show signs of slowing anytime soon. Indeed, the striking new equipment orders that have captivated the industry will impact capacity at some point. However, it will take several months for this equipment to be implemented and even then, if the bottlenecks at driver training schools are not released, the impact will be muted. 

SONAR: OTRI.USA (2020/21 – Blue; 2020 – Green; 2019 – Orange)

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

According to Truckstop.com data available in SONAR, the dry van rate per mile fell another 5% this week to $2.71/mi., inclusive of fuel. This marks three consecutive weeks of dry van spot rates falling at least 5% week-over-week. Spot rates have peaked for this cycle and will remain elevated from a historical standpoint, but will not return to the high of $3.22/mi. on Jan. 3. 

The reason is the ongoing rebidding season that is seeing contract rates pushed up in the range of high single digits to low double digits over 2020 rates. As carriers negotiate contract rates up and close the contract-spot spread, carriers will naturally reject less contracted freight. OTRI and spot rates are highly correlated. When rejections fall, spot rates almost always follow. 

Of the 100 lanes available in SONAR, only 12 saw spot rates increase this week over last. 

SONAR: TSTOPVRPM

Economic stats: Momentum and absolute level neutral

Several economic releases this week are worth noting.

Weekly jobless claims were released Thursday and give us one of the best close-to-real-time indicators of the overall economy.

Jobless claims fell slightly this week and came in below consensus expectations. The negative multiweek trend remains intact though as the four-week moving average continues to move up. Jobless claims were 847,000, which beat the consensus of 875,000, and was down from 900,000 last week. On the positive side, there was good news in the form of continuing claims (a rough proxy for unemployment), which fell this week by 203,000 to 4.8 million. The unemployment rate fell to 6.7% in November from 6.9% in October but held steady at 6.7% in December despite the loss of 140,000 jobs. 

Initial jobless claims (weekly in 2020-2021)

Source: CNBC, U.S. Department of Labor

Turning to consumer spending as measured by Bank of America weekly card (both debit and credit) spending data, total card spending in the latest week available was up 5.7% year-over-year. The picture is more optimistic when focusing on retail spending excluding auto, which was up 12.3% year-over-year last week. Overall card spending decelerated slightly this week from 6% year-over-year last week.

As we usually note, keep in mind there is an ongoing beneficial mix shift from cash to debit that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 13.9% year-over-year and far outpacing credit card spending, which was down 4.9%. After consistently running deeply negative for months and being down precipitously in April, credit card spending does appear to have finally turned the corner.

The main takeaways this week are that stimulus-induced spending remains high, though off of the highs of 10% y/y from three weeks ago. Bank of America took a look at the amount of stimulus payments that have actually been spent so far and they found that 15% of the stimulus payments was spent after 20 days, suggesting that there is potentially pent-up demand remaining. In terms of category beneficiaries of stimulus, furniture and clothing have been the winners, while grocery has been the biggest loser.

By category, online electronics (up 65% year-over-year this week) and online retail (up 69%) continue to be the standout performers. However, the former two categories have slowed meaningfully from their monthslong blistering pace but have settled in at a very high level. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker ones, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually. We would note, however, that we expect a near-complete reversal and decisive change in terms of the winning and losing categories from a year-over-year growth perspective once a large number of Americans are vaccinated, likely sometime in the second or third quarter of 2021.

In a major departure from the trend since March 2020, department store sales grew strongly ast week, up 11% year-over-year. The former is likely a function of stimulus payments juicing spending on the clothing, online electronics, general merchandise and home improvement categories, according to Bank of America. Grocery was up 13% year-over-year this week, extending the winning streak we have seen in the rate of grocery spend in recent weeks and months. Interestingly, restaurant and bar spending rebounded this week and is well off the recent lows of down 22% year-over-year, finishing last week down 10% year-over-year. Given COVID case counts are still extremely high and winter weather remains, the improvement in this category is somewhat puzzling, with the improvement likely due to stimulus. Finally, airlines, lodging, transit and entertainment continue to be the worst-performing categories by far, but all three categories are way up off the bottom. Airlines and entertainment are now declining about 70%-80% year-over-year compared to the trough of down 90%-100% in early April.

Card spending by American consumers has a strong correlation with truckload volumes, so we will continue to monitor this data closely going forward.

Source: Bank of America Securities

Transportation stock indices: Absolute levels and momentum positive for carriers

This past week was one of the worst weeks for our transportation indexes in recent memory, despite a spate of strong earnings reports. Parcels was the best performer this week at -5.8%, while LTL was the worst performer at -11.8%.

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at [email protected], Seth Holm at [email protected] or Andrew Cox at [email protected]

Check out the newest episodes of our podcast, Great Quarter, Guys, here.