MBS MID-DAY: 9/14/2011

(Reuters) - U.S. business inventories rose slightly less than expected in July, suggesting firms remained cautious about future demand at the start of the third quarter.

Inventories climbed 0.4 percent, following an upwardly revised 0.4 percent rise in June, the Commerce Department said on Wednesday. Economists had expected a rise of 0.5 percent in July.

Inventories are a key component of gross domestic product. The ratio between business inventories and sales edged downward to 1.27.

Business sales increased 0.7 percent after a 0.5 percent rise the previous month. (Reporting by Jason Lange, Editing by Andrea Ricci)

The general theme from the overnight session was that the global economy might not be as close to collapsing as previously thought. 2 important drivers which helped stocks/hurt bonds overnight:

- Finance Ministers from BRIC countries will discuss collective purchases of Eurobonds (adding to the China speculation that waxed and waned yesterday)

- Improving outlook on Greece being able to move forward with it's restructuring.

These factors offset a largely-expected downgrade of several French banks and helped Treasuries walk in the door weaker and equities stronger.

But domestic economic data gave pause to the stock rally, and perhaps hope for bonds to draw a line in the sand. That's just what they've done with the 10yr note down to 2.00 after having hit 2.03 earlier.

MBS are slightly improved on the day with 3.5's up 2 ticks to 101-12 and 4.0's up 3 ticks to 104-10. The volatility could cause slightly delays in rate sheets, but at current MBS levels, rate offerings should be better than yesterday's latest.

More data on tap at 10am with Business Inventories and then the 30yr Bond Auction at 1pm.

Reuters) - U.S. producer prices were unchanged in August, held down by a drop in energy goods costs, a government report showed on Wednesday.

The Labor Department said prices paid at the farm and factory gate were slightly higher than the 0.1 percent drop expected by analysts polled by Reuters. The report sent mixed signals about price pressures as energy costs abated, but core prices showed some pass through of recent surges in energy and food costs.

Core producer prices, which strip out volatile food and energy components, rose a less-than-expected 0.1 percent in the month. Analysts had forecast a 0.2 percent increase. (Reporting by Mark Felsenthal; Editing by Theodore d'Afflisio)

(Reuters) - Sales were unchanged from a month earlier, a substantially weaker reading than the median forecast for a 0.2 percent rise in a Reuters poll. Sales growth during July was revised downward to 0.3 percent.

Consumer spending accounts for about two thirds of U.S. economic activity, and the Commerce Department data suggests growth in the first two months of the third quarter was weaker than many economists expected.

An increase in sales of electronics, gasoline and food were balanced with drops in purchases of cars, furniture and clothes. Spending at restaurants and bars also dipped.

Excluding autos, sales increased 0.1 percent in August, below forecasts for a 0.3 percent gain. Sales of motor vehicles and parts fell 0.3 percent.

(Reporting by Jason Lange, Editing by Andrea Ricci)