European Central Bank (ECB) officials are commenting about not expanding the refinancing operation or restarting the bond purchase program. I don't believe the officials because the risk to price levels is to the downside, the ECB wants maximum impact from its operations, and global political officials aren't prepared to bail out Italy and Spain. According to two euro-area officials, the ECB is conducting a comprehensive review of all its policy tools and has no immediate plans to increase stimulus.
The review, mandated by the central bank's six-member executive board, intends to assess the effectiveness of its measures, including the bond-buying program and long-term refinancing operations. The review is scheduled to be completed in June or July, according to the officials, who spoke on the condition of anonymity given that the deliberations are private. A third official said the ECB may not consider taking any further policy action until July, and that the bank sees current market tensions as a way of focusing politicians' minds on reform efforts.
ECB policy makers have no immediate plans for policy action, the first two officials said. They will await the outcome of the next Greek election, and also want to see the central bank's new economic projections in June and a European Banking Authority report on bank recapitalizations, which is due to be published at the end of June.
The inflation risks are to the downside. Commodity prices are falling and commodity prices impact headline inflation. The headline inflation rate typically leads the core inflation rate. With Spanish and Italian bond yields moving higher and the risk-off trade dominating markets, risks to inflation one to two years out are to the downside. The inflation risk is to the downside because if Italy and Spain require a bailout, a market panic could ensue.
Additionally, the ECB will want maximum impact from providing additional stimulus. The ECB can do that by "shocking and awing" the market. Essentially, the ECB is downplaying the chance of additional monetary stimulus while planning to provide the financial system with additional monetary stimulus. Thus, it gets the maximum bang for its buck.
Lastly, world political officials are not prepared to bail out Italy, Spain and their own economies. The simplest solution is for the ECB to print money and purchase Italian and Spanish fixed-income securities. The cost of bailing out Spain and Italy is in the trillions, and that isn't something taxpayers can be on the hook for without risking further contagion.
The ECB should provide more monetary stimulus, and thus investors should be buying equities. The U.S. is the least dirty shirt right now, and investors should own shares of Apple (AAPL), Intel (INTC), Microsoft (MSFT), ConocoPhillips (COP), and LG (LPL). (Readers can click on each of these company names to read articles that provide more details on why I'm recommending them.)