The long awaited day is finally here by which we, of course, mean the day when nobody has any idea what the Fed will do, the Fed included.

Putting today in perspective, there have been just about 700 rate cuts globally in the 3,367 days since the last Fed rate hike on June 29, 2006, while central banks have bought $15 trillion in assets, and vast portions of the world are now in negative interest rate territory.

As we noted yesterday, while the fed funds market implies a 32% probability of a rate hike one day ahead of the decision (which compares to 70% in 1994, 76% in 1999 and 92% in 2004) investors are even more torn, with 57% of respondents in an RBS survey saying the Fed should hike today, but only 42% expecting the Fed will announce a rate hike at 2pm. Of the 113 estimates on Bloomberg, 59 are calling for the Fed to stay put and 51 are calling for a 25bp hike, with the remaining 3 estimates calling for a 12.5bp move.

The Fed itself is not sure what to do: according to many a hawkish move would be not to hike but layer the statement with many caveats how strong the economy is (even as the Fed again chickens out) while the dovish thing would be a "one and done" rate hike with the Fed potentially unleashing a recession-inducing curve inversion.

Then there is the problem with the Fed's rate hike machinery: the Reverse Repo-IOER corridor has never actually been tried in practice, only in very specific "in vitro" settings: at such a turbulent time will the Fed risk crushing its only possible and very much theoretical rate hike mechanism, and perhaps as importantly, with China undergoing currency devaluation and a massive capital outflow, will the Fed risk blowing up the entire Emerging Market complex (even more)?

Finally, unlike any other rate hike in the past, there are the algos to contend with: in the 2004-2006 rate hike cycle HFTs barely existed; this time the Fed's "reaction function" has to take into consideration momentum ignition, spoofing, quote churning and countless other headline-driven market reactions.

So all eyes on the Fed's website at 2pm, if not perhaps for Goldman's - the firm that runs that Fed has spoken, and it see at least four more weeks of ZIRP, if not a zero-bound winter stretching well into 2016.

Should the Fed hike, the biggest question is not what stocks or the short-end of the Treasury curve do, but what the reaction of the long-bond is. After the usual initial kneejerk reaction, if the long-end concurs with the Fed’s view of economic recovery, then banks,
cyclicals and value stocks will receive a bid. Asset allocation toward “strong dollar” & “Fed tightening plays” will harden, with the exception that value will likely outperform growth. If the long-end rallies, signaling a policy mistake, then cash, volatility, gold &
defensive growth will be the way to go. Also, a quiet exit stage left may be prudent at this moment.

One thing that is certain is that while the Fed fiddles, China's market manipulators continue to burn in ever more spectacular fashion, and while yesterday the SHCOMP entertained Chinese market watchers with a tremendous surge in the last hour of trading, today it was the opposite, when the Shanghai Composite Index fell 2.1% to close at sessions low at 3,086.06, sinking in final 15 minutes after gaining as much as 1.7% on light volume. 

"The market continues to be rather volatile with investors becoming bearish at the slightest indication," says Gerry Alfonso, Shenwan Hongyuan director. "There seems to be significant expectations for some type of policy support." Well, and the market gets them... every other day. Then on days like yesterday when it doesn't, it panicks.

"The market is in recovering trend, but without any significant increase in trading volume to support that, greater volatility is inevitable,” Northeast Securities Shanghai-based analyst Shen Zhengyang says by phone, adding that "investors may be selling to lock in profits; there’s also uncertainty over Fed decision."

So in addition to US stocks, Yellen has China to worry about to. Oh, and the rest of the world too.

But going back to the overnight market, aside from China's last minute swoon, Asian equity markets traded higher, tracking gains on Wall Street where energy outperformed in the wake of the latest DoE release. ASX 200 (+0.9%) was bolstered by strength in commodities, while Nikkei 225 (+1.4%) was led by a rebound in Telecoms. JGBs saw tepid trade with volumes ahead of the Fed's decision, while the BoJ were also in the market for JPY 780bln in government debt.

The key event during European hours has been Altice announcing it is to buy CableVision for around USD 17.7bIn to see Altice (+3.3%) among the best performers in Europe. Price action elsewhere in equity markets has been relatively rangebound (Euro Stoxx: -0.2%), with no firm sentiment ahead of the aforementioned Fed rate decision. Similarly, Bunds reside in modest negative territory weighed upon by supply out of both France and Spain, while T-Notes are modestly higher to pare some of the losses seen yesterday after T-notes fell in sympathy with the gains seen in US equities.

In FX, the notable event of the European morning came in the form of the SNB rate decision, with the central bank keeping rates on hold as expected, with CHF strengthening on the back of the release after less dovish than expected comments from the central bank. The SNB noted that CHF has depreciated although consider it still to be overvalued, while also reiterating that they are to remain active in FX markets and downgrading their 2015 CPI outlook by 20bps to 1.20%. Elsewhere, FX markets have seen relatively light newsflow, with UK retail sales (Inc Auto Fuel Y/Y 3.70% vs. Exp. 3.80%) failing to see a sustained reaction and the USD-index residing in negative territory (-0.2%) and as such bolstering both GBP and EUR ahead of the key risk event of the week, the highly anticipated Fed rate decision at 2pm Eastern.

A look at commodities sees the energy complex with mild profit taking after yesterday's DoE inventories showed a build (-2104K vs. Exp. 2000K), with Brent and WTI futures both lower heading into the NYMEX pit open and the former failing to hold gains above the USD 50.00 handle. In terms of metals news, copper has seen strength overnight following reports that a magnitude 8.3 earthquake struck Chile, with the rest of the metals complex seeing relatively choppy price action.

On today's calendar, in addition to the most anticipated FOMC meeting ever until th enext one, we also get US housing starts, building permits, and weekly initial claims data as well as the Philadelphia Fed business outlook.

Bulletin Headline Summary from Bloomberg and RanSquawk:

• SNB keeping rates on hold as expected, with CHF strengthening on the back of the release after less dovish than expected comments from the central bank
• European equities are relatively rangebound, while stock specific news has seen Altice announce it is to buy CableVision for around USD 17.7bIn
• Today's highlights include the highly anticipated FOMC rate decision as well as US housing starts, building permits, weekly jobs data, Philadelphia Fed business outlook and EIA NatGas storage change
• Treasuries post modest gains, curves little changed before Fed statement and updated SEP at 2pm, Yellen presser at 2:30pm as economists/analysts remain split on prospect of 1st rate increase in more than 9 years.
• China’s stocks sank in the last 30 minutes of trading in thin volumes as traders tested the limits of state support amid the biggest price swings since 1997
• China reduced its stake in U.S. government debt in July by about $82.7b, TICS data showed; calculation includes securities held in Belgium, which Nomura says is home to some Chinese accounts
• Bridgewater’s Ray Dalio said in an interview with Bloomberg that he’s worried about the next economic slowdown because monetary policy will be less effective than in the past
• The Swiss National Bank kept interest rates at record lows and signaled the recent depreciation of the franc hasn’t diminished its willingness to intervene in currency markets if needed
• As Greeks prepare for their third vote in less than a year, election fatigue has set in, with voters are bracing for more economic pain no matter who’s elected
• A glut of crude may keep oil prices low for the next 15 years, according to Goldman, with a less than 50% change prices will drop to $20/bbl; firm’s long-term forecast is $50/bbl
• Sovereign 10Y bond yields mixed. Asian stocks higher with the exception of China and Hong Kong, European stocks mixed, U.S. equity-index futures decline. Crude oil, gold and copper fall

US Event Calendar

• 8:30am: Current Account Balance, 2Q, est. -$111.5b (prior -$113.3b)
• 8:30am: Housing Starts, Aug., est. 1.160m (prior 1.206m)
  • Housing Starts m/m, Aug., est. -3.8% (prior 0.2%)
  • Building Permits, Aug., est. 1.159m (prior 1.119m, revised 1.130m)
  • Building Permits m/m, Aug., est. 2.5% (prior -16.3%, revised -15.5%)
• 8:30am: Initial Jobless Claims, Sept. 12, est. 275k (prior 275k)
  • Continuing Claims, Sept. 5, est. 2.258m (prior 2.260m)
• 9:45am: Bloomberg Consumer Comfort, Sept. 13 (prior 41.4)
  • Bloomberg Economic Expectations, Sept. (prior 46)
• 10:00am: Philadelphia Fed Business Outlook, Sept., est. 5.9 (prior 8.3)
• 2:00pm: FOMC Rate Decision: Upper Bound, est. 0.25% (prior 0.25%); Lower Bound, est. 0% (prior 0%)
• 2:30pm: Fed’s Yellen holds news conference

As usual, DB concludes the overnight wrap

A total of 3,367 days have passed since the Fed last raised rates. In roughly 12 hours we’ll know one way or another whether the Fed has decided to end this streak and go against the market and (slight) majority of economist expectations in commencing liftoff, or instead stand pat. Yesterday’s inflation data did little to help fuel support that a move is warranted and so we head into the final trading session before the meeting with a hike priced at 32%. That’s unchanged versus this time yesterday and we’ve been sitting in a small 4% range now for a couple weeks, but that’s well below the peak of 54% back in early August prior to the China devaluation and slightly above the YTD low of 21% back in July. As we’d noted earlier in the week it’s a much more evenly weighted split if you look across economist expectations. Of the 113 estimates on Bloomberg, 59 are calling for the Fed to stay put and 51 are calling for a 25bp hike, with the remaining 3 estimates calling for a 12.5bp move. We still maintain our long-standing call that a hike is unlikely this year, but for now it’ll be all eyes on the FOMC and Yellen tonight.

On this, DB’s Joe Lavorgna, while of the view that the Fed will hold off from raising tonight, is of the belief that Yellen will emphasize in the press conference shortly after that depending on near-term economic and financial market developments, a rate hike remains very much a possibility at the October or December meetings. Meanwhile, DB’s Alan Ruskin makes an interesting point on this too in that the Fed could feel that they could signal something about October closer to the October meeting instead, assuming they stand pat now which would likely be seen as a ‘dovish hold’. While Alan thinks a ‘hawkish hold’ is a more appropriate strong market consensus view leading into the meeting (holding but making October live), the Fed could instead choose to hold firm, not pre-signal October and wait on the data and probably more importantly markets.

Ahead of the outcome and fresh off the back of a decent day for global equities yesterday, bourses in Asia this morning are off to strong starts. The Nikkei (+1.15%) and Topix (+0.91%) have ignored any concerns following the one-notch downgrade of Japan’s sovereign rating by S&P yesterday to A+. The better sentiment is perhaps being helped by weaker than expected export numbers this morning (+3.1% yoy vs. +4.3% expected), down materially from +7.6% in July and which may help support expectations of a response from the BoJ. Elsewhere, in China the Shanghai Comp (+0.51%) and CSI 300 (+0.34%) have recovered from a soft opening start into the midday break, while the Hang Seng (+0.77%) and ASX (+1.32%) are also up. The Kospi (-0.09%) is the only index to see a decline this morning. S&P 500 futures are more or less flat and 10y Treasury yields are down 1.3bps. Credit indices in Asia are around a basis point tighter.

Back to markets yesterday. Indeed, it was a pretty supportive day all round for equity markets with the S&P 500 closing +0.87%, Stoxx 600 +1.53% and other DM markets up similar amounts. Those moves got a kick start from the big rally into the close in China (where the Shanghai Comp finished up nearly 5%).

This was followed in the European session by the news that SAB Miller had been approached for a takeover by AB InBev, helping SAB’s share price to rally nearly 20%. Then later in the day, some supportive US crude inventory data helped fuel a surge in the Oil complex which eventually saw WTI and Brent close up +5.74% and +4.19% respectively. That saw energy stocks lead gains, while the rest of the commodity complex also had a relatively decent day with broad BCOM commodity index up 1% and snapping a three-day losing streak.

The USD had initially traded with some early optimism, although that was quickly pared following the release of yesterday’s CPI data with the Dollar index eventually finishing -0.20%. While the data was pretty much as expected, importantly the release did little to advance the case for a hike today. Headline CPI printed at -0.1% mom as expected in August, leaving the annualized rate on hold at +0.2% yoy. The core reading was soft at +0.1% mom, or just 0.074% unrounded, which saw the annualized rate hold steady at +1.8% yoy (vs. +1.9% expected). The three-month annualized rate however did nudge down to 1.6%, a decline of two-tenths from last month. DB’s Joe Lavorgna also noted that along with the currently low inflation, 5-year forward inflation expectations are comfortably below 2% with the latest reading at 1.44% (down substantially from 1.99% when policymakers last met in July). Elsewhere yesterday, there was some better news on the housing front where the September NAHB housing market index rose 1pt to 62 (vs. 61 expected). Meanwhile, the latest TIC data confirmed a decent decline in Treasury holdings in Mainland China, down $30.4bn in July. 10y Treasury yields eventually nudged up 0.7bps to close at 2.295% while 2y yields (+0.8bps) extended their recent high after closing at 0.813% yesterday.

Data wise in Europe, much of the focus was again on the UK where there were some positive signs in the latest employment and wage growth reports. The July unemployment rate dropped one-tenth to 5.5% (vs. 5.6% expected), while the quarterly employment change of +42k was well above the +18k expected. Average weekly earnings rose +2.9% (vs. +2.5% expected) in the three months to July which was up three-tenths from June. That helped spark a strong day for Sterling which closed +0.97% stronger against the Dollar and +0.79% against the Euro. Comments from BoE Governor Carney also helped support some of that strength after he reiterated that should economic expansion be above trend, labour costs and wage growth continue to rise and core inflation accelerate, then the decision comes into much sharper relief around the turn of the year and as a result ‘it may be appropriate to begin to withdraw stimulus at that point’.

Wrapping up the rest of the data yesterday, Euro area CPI saw a slight downward revision to the final August print at both the headline (down 0.1pp to +0.1% yoy) and core (down 0.1pp to +0.9% yoy). European sovereign bond yields edged slightly higher during the session with DM markets up 2-3bps generally.

Onto the day ahead now. This morning’s focus will again be on the UK where we get August retail sales data. Prior to the main event tonight with the conclusion of the FOMC meeting, datawise in the US we’re due to get more housing data in housing starts and building permits while initial jobless claims and the Philly Fed business outlook are also expected. The focus will however be on the Fed and subsequent Yellen press conference.