PO requesting Developer Capacity Reports

>>(just to shed some light, we work on a agreed monthly amount OF COST that does not fluctuate, not sure if this is the stakeholders trying to squeeze out more from the scrum team)

I would recommend trying to figure out why a stakeholder is asking for this information and understanding what problem they are trying to solve or what objective they are trying to achieve. They may not understand the implications of what they are asking or that what they are asking for may not be what is truly needed to solve their problem. As a Scrum Master, part of your responsibility would be to work with the stakeholders to help them understand how to best engage with the Scrum Team, which would include having the right visibility into the team's work and progress to make sure they are getting what they consider to be their money's worth. If they are not getting value, you would work with the team and the stakeholders to improve.

In your scenario, it seems that the Product Owner (who is also the customer) doesn't feel like they are getting the correct value out of the money that they are spending.  Since it is the Product Owner's responsibility to ensure that the Developers are working on the things that provide the most value, I would question the Product Owner on whether they are ordering the Product Backlog to deliver optimal value. 

The reason the velocity changes is easily explained.  Each item that is worked on has individual challenges and relevant information.  There is no such thing as an exact duplicate of work.  If the Product Owner is actively involved with the Scrum Team, they should be well aware of what is causing the fluctuation. 

I'm also going to venture that when you mention velocity, you are talking about Story Points.  I am not going to give you my full rant on that practice but remind everyone that you are basing predictability on guesses made with sometimes limited information. 

I'd turn this around to the Product Owner to ensure that they are doing their job correctly, that they completely understand what their role is in Scrum and coach them on how to do it more effectively.  As a Scrum Master that is your responsibility.

A word of warning.  

This as the stakeholders would like to increase the amount of items they see in the monthly increments, 

This can easily be achieved by the developers breaking stories down into smaller stories, inflating story points to give the impression that they are working on more things.  Instead of focusing on the number of items in the monthly increments, help them focus on how much value is being delivered in the increments.  Again, this would come back to the Product Owner being better at organizing the Product Backlog to make the most effective use of the Developers efforts.

Due to stakeholder pressure, the PO is pushing me (I'm the SM)  to produce capacity reports of the developers. 

Does that sound like a valid reason to you? Why would a Product Owner transmit a pressure like that on to someone else?

It sounds like there might be an opportunity to coach the PO about value management and how to handle stakeholder interests. How receptive do you think he or she would be to this opportunity?

Thanks all for your suggestions and insights. To give you an update, I've had the discussion with the PO about these capacity reports and they have agree to not require them any longer, only deal being that a monthly report be sent to the PO and stakeholders showing the a visual chart/visualization of our measurement of velocity. 

Good that you didn't get that overhead work. Later If they want to compare the velocities between sprints and ask to increase velocity. Then again the pressure should not be mounted on the team. But as Thomas mentioned, find out what stakeholders really want from this data ? Just filling the 40hrs full of tasks because they are paying a fixed price that would not mean to get desired outcome.There are many ways we can show the velocity inflated.