Sweden’s preliminary inflation print next week is expected to show CPIF accelerating from 0.7% y/y to 1.6% y/y, with higher energy prices lifting the headline rate. Core inflation is also projected to rise in both goods and services, although at a slower pace. Separately, a large furniture retailer has said it will lower prices across Europe; given its sizeable role in Sweden’s furniture consumption, this could temper the furniture-price increases otherwise implied by input costs, as furniture and other core goods tend to track rubber and plastic products, which have risen.
Attention is also turning to El Niño risks for food inflation. El Niño is defined by sea-surface temperature anomalies, with the Niño 3.4 Index at +0.5°C or above indicating El Niño conditions; current assessments assign a 90% probability of a severe event, and a 75% probability of the strongest on record. For Sweden and Europe, the main channel is imported food prices, with cacao, coffee and rice flagged as exposed categories, even if their CPI basket weights are low.
Positioning for Higher Swedish Inflation
We advise derivative traders to prepare for a sharp uptick in Swedish inflation, with CPIF projected to jump from 0.7% to 1.6% in the coming weeks. To capitalize on this spike, we should consider positioning for a stronger Swedish Krona (SEK) using over-the-counter currency options and shorting short-term Swedish bond futures. This sudden rebound, driven largely by energy, is likely to make the Riksbank more cautious about aggressive rate cuts, shifting the short-term yield curve.
However, we must temper our hawkish bets because major corporate moves, like IKEA’s ongoing price cuts across Europe, will likely cap the upside of domestic furniture inflation. While raw materials like plastics and rubber have seen price increases of over 10% in global wholesale markets, retail price compression will offset these input costs. Therefore, we suggest utilizing interest rate swap spreads to hedge against a potential overreaction in the bond markets.
El Niño and the Soft Commodities Market
On the global stage, the severe El Niño conditions present a highly bullish setup for soft commodity derivatives. With sea surface temperature anomalies in the Niño 3.4 region remaining well above the +0.5°C threshold, agricultural markets are bracing for severe supply disruptions. We recommend buying call options on cocoa and coffee futures, as these specific commodities have historically experienced double-digit price surges during similar weather anomalies.
