[Excerpt from The Pickett Line April 2021 Issue]
Welcome to Q2 2021, where just about every market and economic data point will look outrageously positive when compared to last year’s Q2 COVID crash.
With another month now behind us and as we enter the 2nd quarter of what we have often characterized as the great 2021 TL spot market roller coaster ride, we see four primary market themes currently in play that will ultimately determine the path of the ride from here. Or more specifically, just how much longer we can expect to linger up here at the peak and just how steep the drop is on the other side as the market corrects lower over the back half of the year on a Y/Y basis as the cycle likely snaps back into shape.
But before we dive into those, let’s briefly review the Q1 we just put a bow on. As we all know, it was indeed a wild one and very much a tale of two halves. Through mid-February our Q1 DAT Spot TL Index was collapsing even faster than expected relative to our assumed Q4 2020 inflection point of +40.2% Y/Y – clocking in at +31.5% in the February note. Then along comes Winter Storm Uri and the market sling shots us in the opposite direction where our index climbed as high as +39.5% in mid-March before ultimately settling at +38.9% Y/Y for the quarter close. And while this is hardly the strongest technical confirmation of our proposed Q4 2020 inflationary inflection point, thus signaling the TL spot market’s turn lower in the quarters ahead, we believe it will stand as confirmation nonetheless. And if Q4 indeed stands as this cycle leg’s inflationary inflection point, assuming the structural dynamics that drive the TL spot market cycle remain intact (which we do), we should continue to expect to see a Y/Y deflationary spot market by the end of the year.
With all of that said however, we also believe that this Q2 will likely close higher than our Q4 2020 inflection point of +40.2%. But if that is the case, wouldn’t that make Q2 the new inflection point thus deferring our journey to deflation land by at least a couple of quarters? In an otherwise normal market and economic cycle, Yes that would probably be the appropriate read. But given the unique combination of a Uri hangover from Q1, where spot TL rates were accelerated much higher and much sooner than seasonally expected, and a Q2 2020 comp which so far represents the absolute worst of COVID’s impact on spot TL rates in the US, we see this as more of a temporary kink in the chart rather than a new inflection point. And so far, with an initial Q2 2021 read of +54.2% Y/Y, this kink is literally off of our chart which currently maxes out at +50%. Though we have seen it fading consistently lower from where it started at the beginning of the month, which we think will continue throughout the quarter. Which would be weird, right? For that to happen and for the quarter to close lower from here, the net impact of this produce season on Q2 would have to be deflationary. Of course, there will be pockets of tightness and we could see national spot Reefer rates turn higher for some period of time, but given the Uri-driven inflation already baked into the market (i.e. the TL market has arguably been running at produce season rate levels since March), it’s difficult to foresee a scenario where the market sustains another material leg higher in spot TL rates from here – barring another Uri-like event.
And market anomalies aside, as mentioned at the top, the rate battle within the TL spot market will be waged across four fronts. Or in other words, we see four primary market forces or themes that are likely at the controls of our roller coaster over the next few months – the cumulative effects of which will dictate how high we ultimately settle this quarter and the slope of the deflationary correction on the other side of the hill. We have mentioned most of them already, but to summarize (in order of perceived relevance):
1. Winter Storm Uri Hangover: With Uri as the suspected primary catalyst, the DAT Spot TL Index surged $0.20 higher (+9.3%) from February to March to close at $2.39. And through April 19th, it has only given $0.02 of it back on the month. With this run up already baked into the market, we believe that much of this year’s otherwise expected produce season inflation has already been priced in. Should this prove to be the case, then this may be a much more forgiving produce season than most folks currently think, at least with regard to incremental Spot TL inflation from here.
2. Produce Season: The seasonal harvest, which historically runs from April 15th through July 4th depending on climate conditions and in waves starting in the southern US before marching north, will act as the direct counter to the Uri hangover. In a typical market, these short-term TL supply vs. demand dislocations result in temporary TL spot market inflation outbound from active harvest regions. The question this year will be to what extent those dislocations can drive markets higher still from current Uri-induced levels.
3. TL-Intensive US Consumer Spending: After rebounding sharply in Q3 2020 out of the Q2 COVID trough, activity sputtered a bit in Q4 as the recovery appeared to level off somewhat. Though as additional fiscal stimulus has been pumped into the economy, strong retail sales numbers in recent months have been promising. The degree to which that continues across the more TL-intensive Durable and Non-Durable Goods segments (vs. Services) will shape the Demand support propping up the TL Spot market as incremental Supply continues to enter. We get preliminary Q1 GDP and Consumption data at the end of the month so we should have plenty to talk about on this topic in the May note.
4. Q2 2020 COVID TL Market Comp: This one is more a static technical consideration rather than a market force that continues to evolve, but from a year over year standpoint (which is how we fundamentally assess the US economy and the TL market in our methodology), an “unnaturally” low comparison number will yield an “unnaturally” high relative comparison value. Given, this has zero impact on the actual interaction of TL supply vs. demand this quarter – just in how our selected metrics look when plotted on the % Y/Y charts we use to describe the outcome of those interactions over time.
As the quarter develops, we will remain on the edge of our seat as we get more visibility as to the likely path ahead as Supply and Demand further interact to drive Spot and Contract TL rates higher or lower from here and as we continue to navigate what has already been the wildest US TL Spot Market Rate Cycle on record. So keep those seat belts fastened, our ride is far from over.