Ernest Hemingway wrote, “How do you go bankrupt? Two ways. Gradually, then suddenly.” This path is inherent in the rags-riches-rags cycles seen in personal finance arcs to economic bubbles in freight markets.
To combat current and future uncertainty in the world, we very much like to keep the status quo, so it takes a while for consensus to build even as temperatures rise below the surface. Most times, we’re frogs sitting together in the pot. Then, once things finally boil over, the reaction functions kick into high gear when it’s already too late.
But SONAR users have a thermometer to guide them so they can stay safely out of the boiling pot.
This recent review puts it better.
Our mission at SONAR is to bring transparency to markets so all participants can make better decisions with confidence — today and into the future. There are always events outside our control (hurricanes, winter storms, fires, pandemics, etc.), but those with the best knowledge execute with the best plans.
So how do you see around the corners with SONAR? We’ll walk through how you can monitor the national market cycle. A follow-up will look at a few key markets as they relate to national conditions.
The national tender rejection cycle
We are headed out of the bottom of the freight market cycle. It can be seen in the current momentum and SONAR’s Outbound Tender Reject Index, or OTRI. Currently, OTRI is signaling a greater than 4% rejection rate of all tenders, a key marker in pressures for spot movement.
Below this threshold, both spot and contract rates will remain highly deflationary. Spot rates may make or break multiyear lows once in the 2% range. Moving up around this mark, however, things begin to get firmer and provide upward pressures again — primarily in the spot market between 4% and 5%. Contracts will drift to close any gap between spot and contract rates if below the threshold. In 2023, both rate types sank significantly in H1, hitting a six-year low of 2.53% in May. Then, contract rates continued downhill through H2 while the spot floor firmed in the 3% to 5% rejection range.
Once rejection rates are between 4% and 7%, spot rates begin to react with more zeal. This was evident in the chart above beginning in the second half of 2019 between rejections in white and spot rates in red. Duration causes things to go from gradually to suddenly, flipping in one direction or another. Looking backward, this was the market heading into the medium term. It was also when the pain was felt across providers — when spot rates quickly turned contract lanes negative — but did not last long enough to push contracts high enough to compensate or stem the losses.
The table below shows differences between the initial shock of COVID compared to the pandemic and post-pandemic periods in regard to rejections, daily spot rates ex fuel (NTIDL), along with contract ex-fuel (VCRPM1), and finally with deltas for the linehaul rates between each period. The initial COVID shock was extremely volatile for spot rates but was too short to meaningfully change contract rates at the time.
Transitional periods usually live between 7% and 15%
It took over 150 days for rejections to fall from 15% to under 7% in the 2018-19 period. That time frame fell to 100 days between March and July of 2022. In that same period, daily spot rates ex fuel dropped over 40%. In one month between February and March of 2020, conversely, they jumped 20% as seen above. Rate sensitivity is even greater in these periods of extreme change. Concessions are easier too.
As SONAR’s Zach Strickland mentioned in his view of the current environment, the market lives in transition. In fact, for all days starting in 2018 through 2024, the average rejection rate was 12.5%. Put another way, average market tender acceptance compliance has been at 88% since 2018. This is equivalent to a B-plus student at best. The 2023 average compliance of 96.5%-plus (OTRI 3.65) is an aberration, not a good expectation.
The graph below first shows OTRI at a 4% baseline with a yellow line added for the 7% mark and red for the 15%. You can see just how little time is spent below 4% – especially outside 2023.
The supplemental table follows with a view of average rejection rate by year with low and high points for the year. Given the high volatility of 2020, that year is split into two.
Once rejections eclipse approximately 15% to 19% in either direction, spot linehaul rates (ex fuel) will finally overtake/undertake contract linehaul rates (ex fuel).
This is where the pot starts to boil for the clearest sign of a “turn.” Above this line, spot and contract rates are mostly inflationary and short-lived (except for the pandemic bull run). Contracts made in this period and above should be shorter in nature or not at all for any noncore categories.
Once they fall from their peak in earnest, rates discount quickly then have diminishing returns as fewer loads move to the spot environment by way of gaining acceptance and competition within the routing guide.
Below is the spot linehaul-to-contract linehaul spread under SONAR’s RATES12.USA index with a baseline of 0, or the point where spot=contract. OTRI lies over top in light blue with rejection rates on the left Y-axis. In mid-February 2022, the RATES12.USA ($1.20 base fuel) index broke back under 0 at a 19% rejection rate. A month later, the higher fuel basis index RATES.USA inflected at 16%.
Consensus about market change typically happens well after these points as impacts to profitability lag or run countercyclically. Earnings for the first half of 2022 hit record highs for many. Net carrier authorities were positive until the fourth quarter of the year. When FreightWaves CEO Craig Fuller wrote about the imminent correction in late March 2022, rejection rates were moving back under 15%. A week after the article, spot rates were already 20 to 30 cents below contract, having begun the month 10 cents above.
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