German yields waver as inflation data tempers oil surge excitement

By John Geddie

LONDON, Aug 28 (Reuters) - German bond yields wavered on Friday, with investors waiting for data that could demonstrate the drag of low commodity prices on inflation and reluctant to get overly excited about a 10 percent surge in oil.

The bloc's powerhouse economy Germany will publish inflation data for August at 1200 GMT, with readings from various regions during the morning expected to offer some advance clues.

Economists polled by Reuters expect an annualised increase of just 0.1 percent, unchanged from last month, although others are predicting that an earlier slump in Brent crude to levels not seen since 2009 could weigh down consumer prices.

Some market gauges suggest the bloc could even be headed back into deflation in a year's time.

With this on the horizon, investors took little impetus from a sharp surge in oil prices on Thursday -- the biggest jump seen in six years.

"Clearly after this fall in commodity prices and inflation expectations over the last month there is a huge focus on what the actual hard data suggests," said Vatsala Datta, rates strategist at RBC (Other OTC: RBCI - news) .

"Oil prices are so volatile. We have see a surge now but it could quite easily be that we see a fall again. You have to see a sustained move higher rather than a one-off move."

The German reading has particular importance with euro wide data due on Monday, and a meeting of the European Central Bank next Thursday that will likely discuss falling inflation expectations and a slowdown in the world's second largest economy China.

"Inflation for August will be too late for inclusion in the baseline for the September ECB staff forecasts to be presented next week, but will naturally be taken into account by Governing Council members at the meeting," said RBC in a note to clients.

Inflation factors coupled with China worries have also reduced the likelihood that the U.S (Other OTC: UBGXF - news) . Federal Reserve raises interest rates next month despite a strong rebound in domestic growth.

Even (Taiwan OTC: 6436.TWO - news) with some key figures such as the Fed chair Janet Yellen and ECB president Mario Draghi missing, any headlines from a central bank meeting in Jackson Hole will be high on the agenda on Friday.

German 10-year yields -- the bloc's benchmark -- were flat on the day at 0.73 percent at 0740 GMT, having flitted between 0.71-0.75 percent but failed to find any sustained direction. All other euro zone equivalents were also broadly unchanged.

In primary markets, Italy will auction a new 10-year bond, a test of risk appetite at the end of a rollercoaster week that has centred on fears of a slowdown in China. (Editing by Alison Williams)