Sweden’s weak first-quarter GDP was attributed mainly to a 2.1% q/q fall in government spending, while household consumption rose 0.6% q/q and inventories added to growth. Real disposable income increased 1.0% y/y, offering some support to demand. A Bloomberg survey projects CPI inflation of 0.8% y/y this year, a combination that could point to a steady policy stance from the Riksbank.

Inflation data, however, were complicated by tax changes. Final April figures showed headline CPI at -0.1% y/y, the ex-energy measure flat, and CPIF at 0.8% y/y; the same Bloomberg survey expects CPI to rise to 1.3% y/y in May, while the Riksbank targets CPIF at 2%. The government had announced in September it would halve VAT on food products in its 2026 budget, and the VAT cut took effect in April, potentially distorting near-term readings. Riksbank meeting minutes indicated concerns about upside inflation risks, including those linked to the Iran war, even as rates were left unchanged.

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Riksbank Sentiment and Market Mispricing

We see the recent soft economic data from Sweden as potentially misleading. While Q1 GDP contracted due to lower government spending, the important signal was that household spending actually grew, supported by rising real incomes. This consumer strength suggests the economy has a more solid foundation than the headline number implies.

The current low inflation readings are being artificially suppressed by the government’s temporary VAT cut on food, which took effect in April. We believe underlying price pressures are building, a view supported by recent data from Statistics Sweden showing May’s CPIF inflation jumped to 1.7%, surprising markets that had only priced in a 1.3% rise. This indicates the temporary relief from the VAT cut is already fading and core pressures are returning.

The Riksbank’s own minutes show they are more concerned about inflation than the market seems to believe. Officials are worried about upside risks from geopolitical events like the ongoing conflict in Iran, which continues to affect shipping and energy prices. We should not underestimate their willingness to act if inflation pressures continue to build more broadly.

This situation feels similar to the 2021-2022 period, where initial inflation spikes were dismissed before central banks were forced into aggressive action. Therefore, we believe the market is underpricing the probability of future Riksbank rate hikes. Traders should consider positions that benefit from higher short-term Swedish rates, such as paying fixed on interest rate swaps.

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Trading Implications and Krona Outlook

Given this divergence between market pricing and potential Riksbank action, the Swedish Krona appears undervalued. A more hawkish central bank would be a significant catalyst for SEK strength. We see opportunities in buying call options on the Krona, particularly against the Euro, to position for a surprise tightening of monetary policy.

The clear disagreement between the soft official data and the central bank’s hawkish undertones creates significant uncertainty. This points towards higher volatility in the coming weeks, especially around the next inflation data release. Buying option straddles on the EUR/SEK exchange rate could be an effective way to profit from a large price move as the market digests this conflicting information.