Monday, July 22, 2024

Morgan Stanley sees freight upcycle nearing

A dash of optimism around improving freight demand in the back half of the year was noted in a quarterly survey of shippers released Monday.

Morgan Stanley’s (NYSE: MS) Freight Pulse showed sentiment among the group improved slightly even as data points have yet to point to an upward trajectory for freight markets. Of shippers polled, 38% said they will likely maintain current inventory levels, which was a 10-percentage-point increase from the fourth-quarter report. The number of respondents saying they need to reduce inventories also declined for the first time since the third quarter of 2021.

Nearly 75% of shippers surveyed expect inventories to normalize in 2023, with almost 50% saying it will happen in the second half of the year.

“Despite all the bad headlines and mixed datapoints on macro, our latest quarterly Shipper Survey keeps showing signs of improvement under the surface,” stated Ravi Shanker, Morgan Stanley transportation equity analyst.

Heading into the first-quarter earnings season, which starts in earnest next week when J.B. Hunt (NASDAQ: JBHT) reports, many analysts are taking a wait-and-see approach to the back half after being more bullish to start the year.

Outlook improves among shippers, capacity to stay loose

Shippers’ overall view of the economy also moved higher for the second consecutive quarter. However, a 4.9 reading remained “comfortably below” the 15-year-old survey’s long-term average of 5.8. Shippers from the manufacturing and food and beverage verticals were most constructive while responses from retail shippers saw the biggest declines.

The outlook for transportation capacity across all modes loosened again.

Capacity predictions for the next six months were the loosest for airfreight and ocean, while rail capacity is expected to be the tightest. However, the outlook for rail capacity saw the biggest sequential deterioration out of all modes.

The outlook for both volume and pricing growth in trucking was described as “pretty grim,” with volumes “consistently in negative territory (similar to 2020 levels but slightly better than 2009 levels).” Pricing sentiment saw the biggest declines ever recorded, down in the low-single-digit range. However, the report pointed out that the comparisons were to record price levels.  

FreightWaves’ trucking data has yet to inflect positively. Rejected tenders continue to bobble along the bottom alongside spot rates.

Chart: (SONAR: OTRI.USA). A proxy for truck capacity, the Outbound Tender Reject Index, shows the number of loads being rejected by carriers. The index has fallen to below 3% compared to a little more than a year ago when fleets were rejecting more than 20% of loads under contract. To learn more about FreightWaves SONAR, click here.

Chart: (SONAR: NTIL.USA). The National Truckload Index (linehaul only – NTIL) is based on an average of booked spot dry van loads from 250,000 lanes and 10,000 daily spot market transactions. The NTIL is a seven-day moving average of linehaul spot rates excluding fuel. Spot rates are currently 31% lower y/y.

There was no change in truckload capacity expectations, with most respondents indicating intermodal will soon be the loosest mode after being the tightest over the last three quarters. Even with lower TL rates and rail service issues, 43% of shippers said they are shifting some freight from TL to the rails. This was the first increase in a year for the metric with only 25% saying they would make the change a quarter ago.

The report also showed rail volumes will be flat year over year (y/y), down from a 0.7% growth expectation last quarter. Pricing expectations stepped slightly higher but remained below the long-term average. Shippers said rail service has deteriorated, almost reaching the survey low established in the third quarter of last year.

Expectations for parcel call for slight y/y volume growth (except for airfreight) with the rate outlook snapping back into positive territory.

“We are not sure what the macro outlook holds in store for us but what is very clear is that at the current pace of destocking, inventory levels should be normalized soon and if the consumer holds up in 2H23, conditions are ripe for a restocking upcycle (esp. if we also overcorrect on inventory destocking),” Shanker said.

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