In the half hour between 8:50 and 9:20am, Fannie 4.0 MBS lost about 7 ticks, bringing prices in line with their lows from yesterday. 10yr yields briefly hit 2.30 before rebounding to 2.28. MBS recaptured a good portion of those losses over the same time period and now trade at 104-03. That leaves things just slightly weaker than yesterday's mid-range but 4 ticks up on the day for MBS (and almost 3bps lower in 10yr yields). The rise and fall of domestic economic data continues to be a non-event this morning. Sarkozy and Merkel's meeting is taking place now with a press conference scheduled for noon eastern time. 10 yr yields continue to "triangle" into the meeting.

(Reuters) - U.S. industrial output rose in July at its fastest pace in seven months as strong auto production boosted manufacturing and extreme heat led Americans to use more electricity for air conditioning. Industrial output rose 0.9 percent last month, more than twice June's 0.4 percent gain. Estimates for output in both May and June were revised upward. Economists polled by Reuters had expected a 0.5 percent increase in July output. Manufacturing increased 0.6 percent during the month, with an index for motor vehicles and parts surging 5.2 percent, according to the Federal Reserve data released on Tuesday. Utilities rose 2.8 percent percent during the month, more than three times the rate of growth in June. Capacity utilization, which gauges firms' performance relative to their full potential, rose to 77.5 percent in July from an upwardly-revised June reading of 76.9 percent. That was the highest since August 2008. (Reporting by Jason Lange, editing by Neil Stempleman)

Fannie 4.0 MBS are up 3 ticks on the day at 104-02 and 3.5 coupons are down 2 ticks at 100-24. Yesterday's new originations for Fannie and Freddie 30yr fixed MBS went almost exclusively to the 4.0 bucket (over 99%), which also accounted for over half of all originations yesterday. If it feels like you're doing more 15yr fixed loans, you probably are, as Freddie noted yesterday that 15's now account for 37% of refi volume. The morning begins as so many have this summer, driven more by European headlines than the usual domestic economic data. Bond markets are perhaps slightly weaker since 830am economic data, but the bulk of the corrective movement (read: 10's from 2.31 back down to 2.28) came on the heals of a weaker than expected GDP reading out of Germany (+0.1 vs +0.5 q/q consensus) as well as other weaker growth stats elsewhere in the Eurozone. Market attention stays overseas for much of the morning as the emergency meeting between Merkel and Sarkozy is today's big ticket item. Reuters reported "President Nicolas Sarkozy and German Chancellor Angela Merkel are under pressure to show financial markets they are in agreement on doing more to shore up the embattled currency union -- or risk watching the euro zone unravel. Many experts say the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the euro area to issue joint euro bonds. But officials in Paris and Berlin have tried to play down expectations over the 10 a.m. EDT talks and 12 p.m. EDT news conference, saying euro bonds are not on the agenda." Rate sheets are anyones' guess this morning as far as timing and pricing, but things aren't so volatile as to prompt serious delays or deterioration. A lot depends on the extent of a particular lender's repricing behavior yesterday. Initial reprice targets are 104-06 and moving higher on the upside or a break of yesterday's 103-30 lows and moving lower on the downside.

The US Labor Department reported a 0.3% increase in July Import Prices after a 0.6% decrease in June. Economists polled by Reuters expected a 0.1% decrease today. The most notable upticks were seen in the Petroleum component and the other components that are transported, delivered, shipped via fuel burning vehicles. Petro itself was up 0.6 vs -2.2 last month. But the rising import prices were offset by all-time records for a few of the export price internals. Although the headline export delta showed a 0.4 pct drop, the year-over-year figure, factoring out the laggard agriculture component was +8.3 pct, the largest rise on record. A similar all-time best level was seen in the +5.7 pct rise excluding autos. Changes in export prices have been relatively flat in recent cycles.

(Reuters) - U.S. housing starts fell less than expected in July as builders broke ground on new multifamily units likely to meet demand for rental apartments, while permits for future construction dropped, a government report showed on Tuesday. The Commerce Department said housing starts slipped 1.5 percent to a seasonally adjusted annual rate of 604,000 units. June's starts were revised down to a 613,000-unit pace from a previously reported 629,000 unit rate. Economists polled by Reuters had forecast housing starts to slow to a 600,000-unit rate. Compared to July last year, residential construction was up 9.8 percent. A bloated inventory of unsold homes and a weak economy are weighing down on the housing market, whose collapse was the main catalyst of the 2007-09 recession. A large foreclosure pipeline also is not helping, leaving builders with little incentive to break ground on new projects. Sentiment among home builders was steady at low levels in August, a survey showed on Monday, but they were pessimistic about sales over the next six months. But demand for rentals, as Americans shun homeownership because of plummeting home prices and a 9.1 percent jobless rate, is stemming further declines in home construction. (Reporting by Lucia Mutikani, Editing by Andrea Ricci)