Bankof America – Through all the noise, freight markets have found their groove
This week’s DHL Supply Chain Pricing Power Index: 70 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 70 (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.
Without much volatility in volumes and rejections over the past three weeks, freight markets have seemingly found their groove. The tune is akin to Berlin techno. To some, its pace is smooth and machine-like. To others, its pure chaos.
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 1.7% this week to 13,817. 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 18% yoy, a slight deceleration from last week’s 21% growth rate.
Freight volumes have been walking the x-axis since the first week of January, bouncing between 13,600 and 14,200. This is typical for the month of January, when freight flows lull in the early weeks of the year. While this year is following a similar pattern, it is at an extraordinarily high level. If the pattern continues, we should expect to see volumes pick up speed toward the end of February.
From a geographic standpoint, many of the markets we highlighted strength in last week retreated this week. This includes port locations on the West Coast, the Southern port cities of Houston and New Orleans, and East Coast cities like Savannah, Georgia, and Elizabeth, New Jersey. Freight flows picked up in the Midwest and upper Midwest ahead of a gnarly winter storm currently encroaching.
Consumer spending data from Bank of America remained promising this week, although the pace has cooled. For the latest week (ending Jan. 30), consumer spending was up 5.3% yoy, almost identical to last week’s growth.
However, Bank of America did highlight that the boost to spending from stimulus checks is waning. Total card spending for the lowest income cohort settles back in-line with the pre-stimulus spending range of up 10% yoy, a sharp decline from the peak of 22% up yoy the week of Jan. 10.
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 found a floor and is also walking along 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 22.42% currently, and the rate of decline has decelerated meaningfully over the past two weeks. In fact, OTRI actually notched its first week of acceleration since Christmas this week.
Carriers are rejecting freight at historically striking levels, but the market seems to be getting accustomed to it. We’ve heard from our calls with brokerages that capacity is not as hard to secure as it was in the back half of 2020, even with carriers rejecting nearly 1-in-4 contracted tenders.
There has not been an influx of new capacity added, nor a steep decline in demand. The past few weeks have seen lower rejection rates and in turn lower rates because shippers have improved routing guides with higher contract pricing. As the spot-contract spread declines, so do the benefits of rejecting contracted freight in favor of testing spot markets.
SONAR: OTRI.USA (2020/21 – Blue; 2020 – Green; 2019 – Orange)
Spot Rates: Absolute level positive for carriers, momentum positive for shippers
Spot rates have a high correlation to tender rejections, so we typically see spot rates move directionally similar to rejection rates at a lag. This held true this week as spot rates stayed steady at $2.71/mile, inclusive of fuel.
This marks the first week since the beginning of the year that spot rates did not decline after falling steadily from $3.22/mile on Jan. 3. Spot rates currently sit 32.8% higher than at this time last year, with the gap narrowing in recent weeks as spot rates fell fairly significantly in January. The gap had been as wide as about 50% at the peak in the fall of 2020 and then in December.
Our thesis on spot rates remain unchanged: We expected spot rates to fall once they reached well above $3 per mile. We do expect spot rates to stay elevated by historical and y/y standards over the coming weeks and months as retail inventories are replenished, stimulus checks are disbursed (which is and should continue to reaccelerate consumer demand) and as the industrial economy in the U.S. (and globally) continues to recover.
Against this positive fundamental backdrop is an environment of slowly rising capacity (back half 2021 loaded due to new truck delivery schedule) and less pressure on routing guides as contract rates are renegotiated higher by about 10% on average. This is already starting to play out so we do not believe that spot rates will fall too much farther given tender volumes have bottomed out and turned back up, the continued tight capacity and robust backlog for ocean containers.
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 materially this week and came in below consensus expectations, breaking the negative multiweek downtrend. Jobless claims were 779,000, which beat the consensus of 830,000, and were down from 812,000 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 193,000 to 4.6 million. Jobs numbers for January were just released — the U.S. added 49,000 jobs and the unemployment rate fell to 6.3%.
Initial jobless claims (weekly in 2020-21)
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 2.3% year-over-year. The picture is more optimistic when focusing on retail spending excluding auto, which was up 10.6% year-over-year last week. Overall card spending decelerated materially this week from 5% year-over-year last week. However, it is important to note the fact that the week ended on a payday (Jan. 30), which badly distorted the data. Backing out that effect, consumer card spending last week was up 5.3% and in-line with the recent trend.
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 9% year-over-year and far outpacing credit card spending, which was down 7%. 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 the benefits from stimulus spending are starting to fade and become less noticeable. Due to this, spending for the low-income cohort has decelerated back down to 10% year-over-year from the recent peak of 22%. Regional differences in spending are apparent, with the West notably weak and the South strong.
By category, online electronics (up 61% 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, general merchandise and — new this week — department stores. 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 last week, up 23% 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 9% 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 65-75% 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 an outstanding week for our transportation indexes as they rebounded from one of the worst weeks in recent memory. There were numerous strong earnings reports this week. LTL was the best performer this week at 8.6%, while logistics was the worst performer at 1.6%.
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Bankof America – Through all the noise, freight markets have found their groove
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