Redwood Report: Market Intel Week of December 11, 2023

It’s almost Christmas, and Santa is ready to gift the freight market with its usual late-December capacity crunch. Freight volumes are beginning to show seasonal declines, and yet tender rejections are growing and will continue to do so. The spot market is still soft (OTRI 3.76%), but the incoming imports that we projected back in November have kept trucks moving. Looking ahead, these same import trends — coupled with driver absenteeism, truck repositioning, and the pre-Lunar New Year period — are going to cause a capacity crunch that will be even more extreme than the post-Thanksgiving market tightening. Remember, you heard it from Redwood first!

Carriers and brokers alike are feeling the pain of rate compression, even as fuel prices decline. The result? Continued market exits not just from carriers, but also brokers. In fact, more than 300 brokerages are closing every month. These exits lead to freight being repriced at higher levels, so this is an important trend to watch.

As we predicted, the post-Thanksgiving period saw the tightest market of the year, as we watched the load-to-truck ratio climb to 3.53 to 1. Still, almost all logistics providers are accepting their contract freight, as the contract-to-spot spread is still at $.46 keeps contract freight healthier than the spot market. We’re watching this number closely, as contraction in that spread is a step towards the creation of a stronger spot market. We will see some of that contraction in the coming weeks, and further out in the landscape we may see inventory restocking and potentially lower interest rates close the gap completely.

Read on for a closer look at these trends, as well as regional dynamics.

We hope everyone gets in the holiday spirit, even if freight brokers feel like there is coal in their stockings right now. We’ll be back next week with another update!

Expect Things to Heat Up in January

The freight market continues to slowly walk toward the Christmas holiday, which will come with the inevitable capacity crunch. Drivers are either heading home for the holidays, or starting to run local/regional mail loads contracted by the United States Postal Service, which outsources to handle seasonal heavy demand. We expect to see freight volumes begin to show seasonal declines, as tender rejections have now shown growth for four consecutive days. It still appears that the spot market will be fairly tepid next week, but the impact of imports on freight volumes that we highlighted last month are showing up — and keeping seasonal volumes fairly strong.

Looking at the Inbound Ocean TEU's Volume Index (IOTI), we see strong imports continuing through January, which will challenge the market significantly. We expect driver holiday absenteeism, asset repositioning and the pre-Lunar New Year — a late February 9 this year — to drive a big capacity crunch in the first week of January. This will be even bigger than the post-Thanksgiving crunch, and pressures will linger through the second week of January as well. Just like the heads-up we gave in regard to the post-Thanksgiving capacity crunch, this is your warning to prepare now for this market tightening.

Rate Compression Continues to Drive Exits

The overwhelming sentiment from the carrier and broker community is actively starting to shift, as the pain of rate compression has only increased. The upward trend of carrier costs has continued after the Thanksgiving holiday, with the SONAR NTIL (National Truckload Linehaul) reaching $1.69, which is the highest it has been since July 13. The DAT is also reporting that spot rates have been rising seasonally, as carriers have reached the bottom of the market against current levels of demand. Rates are up to $2.12 per mile (including fsc), which comes even as fuel costs have decreased to their lowest level since July, particularly in the Gulf Coast region which hit $3.64. This is not a surprise. Going as far back as 2015, we have never seen December costs below November costs. This upward movement will only continue through the rest of the month, particularly as we get into the week leading up to the Christmas holiday. 

While carrier authorities have been cycling out of the market quickly, freight brokerages have been coming out of the market as well. More than 300 freight brokerages are closing every month, and this trend will likely accelerate, as well as the continued exit of carriers. Given that freight brokerages control more of the market than they did in previous downcycles, these exits are extremely important to watch. They will result in more freight being re-priced higher, even prior to the full turn of the freight market.

Demand Trends Look Strong

Demand continues to move. The week after Thanksgiving saw the load-to-truck ratio shoot to 3.53 to 1, which made it the tightest market of the year as defined by the DAT. Major markets felt significantly more pressure than this, particularly through the first three days of the week when trucks were repositioning and shippers were gearing back up. The Outbound Tender Volume Index (OTVI) also reflected the strength of this pressure, and it stands at 11,793 as this is being written — the strongest market volume we have seen since late September 2022.

There are those who would challenge this perspective and call demand still soft. From the perspective of carriers and brokers, it’s easy to feel that way with the OTRI still extremely low at 3.6% — which means that, rather than risking the loss of volume in the market, almost all logistics providers have chosen to accept their contracted freight. With the contract-to-spot spread still at +$.46, this rejection level will likely continue until a tightening of that spread takes place. Generally, a $.25 spread indicates a spot market that’s coming back to life. Spot rates moving higher, along with contract rates declining, will be a step in this direction. If restocking does indeed occur in Q2 2024, and later months bring interest rate cuts, there could be a larger demand volume on the horizon for 2024 that would challenge current and future capacity.

A Closer Look at Regional Volumes

Looking ahead to the back half of the month, we expect tighter capacity across the entire country as carriers look to get drivers home and repositioned, and the post-Christmas period will surely challenge routing guides. Expect the Midwest to see the most pain as capacity is pulled from Chicago (1.0 to 1) to neighboring markets such as Cedar Rapids (2.8 to 1), Green Bay (2.7 to 1) and Minneapolis (2.1 to 1). The West Coast has seen cooling over the last week, but watch for the region to flip from Los Angeles (3.4 to 1) and the Southwest up into the Pacific Northwest markets of Portland (2.8 to 1) and Seattle (2.4 to 1). The Mid-South has been relatively quiet and still has plenty of capacity as the region is in its seasonal lull, particularly Texas. However, capacity will be stretched as Memphis (3.0 to 1) looks to pull capacity from neighboring markets, particularly in Arkansas (Little Rock, 2.8 to 1). The Southeast is flush with outbound capacity as freight remains difficult to come by (Atlanta, 1.0 to 1). Carriers are already looking to avoid the region on inbound freight, causing rates to rise quickly, particularly in Florida (Miami, 0.8 to 1). The Northeast will also see capacity tighten the rest of the month, particularly out of Elizabeth, NJ (2.2 to 1), Baltimore, MD (2.4 to 1), and Harrisburg, PA (1.9 to 1).

Top 3 Charts for the Week

Load-to-Truck Ratio Reflects Tightening

The week after Thanksgiving saw the load-to-truck ratio rise to 3.53 to 1, which made it the tightest market of the year. Capacity will tighten again as December proceeds.

Carrier Exits Accelerate, Further Tightening Capacity 

Rate compression and other pressures have resulted in the lowest carrier count in over two years. Exits are only picking up speed.

Shipping Volumes Are High

The Outbound Tender Volume Index (OTVI) reflects the highest market volumes since September 2022.

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