Last Week’s Pricing Power Index: 45 (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 gain negotiating power for rates.
FreightWaves’ Pricing Power Index uses the analytics and data contained in 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:
Critical Events: Short-Term Neutral, Medium-Term Positive for Carriers.
This week began with drone attacks on the world’s largest oil production facility in Saudi Arabia. The attacks affected half of Saudi Arabia’s 12 million barrels per day of production. With daily oil consumption pegged at around 100 million barrels per day, that means roughly 5% to 6% of daily global oil supply was knocked offline. The timeline for this production to resume has changed numerous times this week, but most of the capacity at the affected facilities should be up and running over the next few weeks. Oil markets initially reacted violently to the upside, closing up 15 percent on Monday. At that point, it looked like diesel prices might climb by $0.50 or more per gallon. Those fears were diminished by Wednesday though as oil futures (WTI.USA) closed only 5.9% above Friday, Sept. 13’s close, giving back much of Monday’s gains as the timeline for production coming back online improved.
United Auto Workers Strike
On Monday, almost 50,000 United Auto Worker Union (U.A.W.) employees at General Motors Company (NYSE: GM) walked out on strike. In addition, access to certain plants have been blocked and Teamsters are refusing to pick up or deliver to GM locations based on solidarity. This is causing facilities to shut down and inventories to stack up, not only at GM, but also at its thousands of vendors. Outbound volumes out of Michigan, Ohio, and Indiana are down week-over-week. Inbound volumes to Laredo and El Paso, Texas, are also both down double digits this week as GM parts bound for Mexico are stuck at its Detroit facilities.
Diesel prices began the week under pressure from the drone attack on Saudi Arabia’s oil production facilities. Expectations were for diesel price spikes of $0.50 or more as oil prices closed up sharply by 15% on Monday before giving up most of these gains by mid-week. Fortunately, the diesel truckstop national average price per gallon (DTS.USA) has only increased six cents or 2.03% this week. The timeline for the damaged Saudi facilities to be fully back online could be days or weeks. Any further strikes or threats to oil production facilities across the globe could send oil prices, and therefore diesel prices, sharply higher. Any sustained sharp increase in fuel prices would diminish negotiating power for carriers in terms of line-haul rates as passed on fuel surcharges are likely to eat into shipper budgets.
Load Volumes: Momentum and Trend Positive for Carriers.
The Outbound Tender Volume Index(OTVI.USA)is currently at 10,552.37, which is 4.87% higher than this time last year. On a week-over-week basis, OTVI.USA is down 2.65%. OTVI.USA has been trending upwards since mid-July when the index rose above strong 2018 levels. However, there were significant headwinds this week with the UAW strike against General Motors. Outbound volume is down over 10% since Monday in the Detroit market where the strike is most heavily concentrated. The strike is having a material impact on the entire state of Michigan – the state-level volume index (OTVI.MI) is down nearly 5% over the past week. General Motors has plants spread over many states in the midwest and northeast, but most haven’t felt much of an impact from the strike besides Indiana which is down 2.2% since Monday.
Futures Curve: Absolute Levels and Near-Term Trend Favors Shippers.
The forward curve is anticipating a run-up in spot rates through the end of the year, with December contracts trading near the $1.55 per mile level compared to current dry van spot rates of $1.43. This is positive for carriers. That being said, over the past week, the forward curve has downshifted by a few pennies across the curve, suggesting a modest dampening of very near-term expectations, which would favor shippers.
SONAR: FWD.USA, FWD7.USA, FWD30.USA
Tender Rejections: Trend and Absolute Levels Positive for Shippers, Momentum Positive for Carriers.
OTRI.USA is currently at 5.92%, which is up from 4.85% last week and up 57% off the 3.78% trough experienced in mid-August. Despite the uptick over the past month, outbound tender rejections are at a very low level historically on an absolute basis.
Year-over-year comparables are difficult because OTRI.USA did not fall below double-digits in 2018. Excess capacity is beginning to exit the market and retail season should support continued firming of rejection rates.
Trucking Regulations: Slight Positive for Carriers. Trend Favors Shippers.
The FMCSA is considering addressing driver coercion as part of the new hours-of-service (HOS) regulations that are currently being contemplated. In the first listening session on the HOS changes, the issue of driver coercion was introduced. While coercing drivers to break HOS regulations was officially banned with the Coercion Rule in January 2016, coercing drivers to legally manipulate HOS rules to deliver loads on time is still legal. If this rule is adopted in the next HOS changes, it could reduce driving hours and limit capacity. With this said, if the latest HOS proposed changes are adopted it will likely add capacity as drivers would have more flexibility to pause the 14-hour window to avoid weather and congestion. This will likely add to driver productivity (miles per driven per day) which has the effect of increasing capacity.
Economic Policy: Positive Momentum for Carriers.
Current economic policy is still “dovish” (i.e. stimulative) and favors carriers. On Wednesday, the Federal Reserve lowered its target for short-term interest rates by a quarter of a point to 1.75-2.00%. The market sees the Fed cutting rates at least one more time by a quarter of a percentage point in coming months. Fed-funds futures see a 59% probability of that happening in December and a 73% chance by January, according to the Chicago Mercantile Exchange. Federal Reserve Chairman Jerome Powell added that the Federal Reserve is prepared to act aggressively if the economy weakens further.
In the midst of a slowdown in global growth, nearly all developed world central banks are in aggressive easing mode and some have even restarted quantitative easing. When interest rate policy is effective, it generally boosts the economy with a two to three-quarter lag and, in the meantime, we think a strong consumer in the U.S. is enough to support rates into the holiday season.
Furthermore, trade tensions have continued to ease between the U.S. and China, favoring carriers on the margin should the status quo prevail. However, trade war noise has been eerily calm in front of the two sides upcoming meeting in Washington and has taken a back seat to the Saudi oil production shutdown news.
Economic Stats: Positive Momentum for Carriers.
Deloitte’s annual survey of holiday spending intentions and industrial production numbers were announced this week and were better than expected and favor carriers.
FedEx stock tanked on an earnings miss and issuing disappointing guidance, extending a multi-quarter trend of slashing estimates. The company largely blamed the weak global macroeconomic environment for its woes. “I think there is a lot of whistling past the graveyard about the U.S. consumer and economy versus what’s going on globally,” FedEx CEO Fred Smith said during the company’s earnings call. If FedEx is the canary in the coal mine for transportation companies and Smith’s comment proves accurate, any global macroeconomic weakness spreading to the U.S. would be a positive for shippers. At this point, FedEx is mostly an isolated data point with most transportation companies suggesting the worst is behind us.
Ten-year bond yields currently sit at 1.80% compared to 1.90% last week. However, this is well off the three-year low seen in early September of 1.45% as markets digested the worst of the trade war news and global economic data continued to weaken. Bond yields are the markets’ best indication of the outlook for future growth and inflation. The sharp move up in yields over the past month suggest the financial markets are anticipating a bottoming of economic growth and inflation, as well as incorporating a brighter outlook for cyclical industries like trucking that perform better in a strengthening economy.
Three Month Pricing Power Index Outlook: 60 (Carriers)
The full Pricing Power Index Report is live on SONAR in the Market Insight and Research tab.
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