By Stella Qiu

SYDNEY, March 31 (Reuters) -Asian shares were headed for a second quarterly gain on Friday while bonds were enjoying the best month since 2008, but the market was braced for a stormy session after an upside surprise in German CPI raised the stakes for U.S. inflation data.

Also making headlines on Friday, Donald Trump was indicted after a probe into hush money paid to porn star Stormy Daniels, becoming the first former U.S. president to face criminal charges even as he makes another run for the White House.

The buoyant mood is likely to run into resistance in Europe, with caution setting in ahead of the euro zone inflation data. The pan-region Euro Stoxx 50 futures STXEc1 was flat, while S&P 500 futures ESc1 eked out a gain of 0.2%.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gained 0.7% on Friday, heading for its first March gain in four years with a rise of 2.5%, as fears of a global banking crisis receded.

It is on course for a quarterly gain of 3.6%, after surging 12% in the three months that ended in December.

Japan's Nikkei .N225 also leaped 1%，as inflation data for the capital Tokyo highlighted broadening price pressures.

China's blue chips .CSI300 rose 0.2%, while Hong Kong's Hang Seng Index .HSI was last up 0.6%, after China's PMI data showed that the recovery in the services sector was gathering pace and manufacturing activity expanded faster than expected.

Investors cheered a major revamp plan by Alibaba Group 9988.HK, taking it as a signal that Beijing's regulatory crackdown on technology firms was ending. Alibaba's shares jumped 3.5% on Friday, bringing its weekly gain to a whopping 17%.

Chinese e-commerce firm JD.com Inc 9618.HK jumped 6% after the company said it planned to spin off its property and industrial units. .SS

On Thursday, Wall Street was boosted by gains in technology-related shares, although regional bank shares fell after Treasury Secretary Janet Yellen said banking regulation and supervisory rules need to be re-examined.

The Dow Jones .DJI rose 0.4%, the S&P 500 .SPX gained 0.6% and the Nasdaq Composite .IXIC added 0.7%.

Markets are shifting their focus back to inflation and the outlook for interest rate hikes on hopes that the recent bank turmoil has been largely contained.

A slower-than-expected decline in German inflation has raised the stakes for euro zone consumer inflation and for U.S. personal consumption expenditures (PCE) inflation, tracked by the Federal Reserve for monetary policy, later in the day.

Economists are expecting the PCE index to ease to 0.4% in February from January when it rose 0.6%.

However, there is still an expectation that banks will tighten lending following troubles at U.S. regional banks and the Credit Suisse takeover, so central banks do not have to hike more.

"The underlying source of these stresses, which have to do with interest rates, inverted yield curves, etc., is still with us, so these stress factors have not gone away. I suspect we will see bouts of volatility in markets during 2023," said Herald van der Linde, head of equity strategy for Asia at HSBC.

"If we look at upside until the end of the year, I think China could do very well," said van der Linde, adding that the H-share market in Hong Kong, which is sensitive to lower U.S. yields, could see a 20% upside in prices.

Fed funds futures are still split on whether the Federal Reserve will hike or not at the next policy meeting in May, while pricing in a rate cut by November. That compared with an overwhelming bet on a 25 basis point hike a month ago before the banking volatility started. FEDWATCH

Overnight, three Fed officials kept the door open to more rate rises, although two of them noted that banking sector problems could generate enough headwinds on the economy to help cool price pressures faster than expected.

U.S. Treasuries had a blockbuster month, with the two-year yields US2YT=RR down a whopping 68 basis points to 4.1120%, the biggest monthly decline since early 2008. Ten-year yields US10YT=RR were 35 bps lower this month to 3.5602%.

Moves in foreign exchange markets were muted on Friday, but the U.S. dollar is on course for a 2.7% monthly drop against six of its peers. FRX/

The euro EUR=EBS, which hit a one-week high against the dollar overnight on German inflation data, is set for a 3% monthly jump to $1.0902, while the yen JPY=EBS, which benefitted from safe-haven flows,is headed for a 2.5% gain for the month.

Oil prices seesawed on Friday, and were down more than 3% for the month. U.S. crude CLc1 futures were flat at $74.40 per barrel, while Brent crude LCOc2 futures slipped 0.1% to $78.52 per barrel.

Gold XAU= hovered around the highest since April last year, up more than 8% for the month to $1,980.20 per ounce. GOL/

Reporting by Stella Qiu; Additional reporting by Divya Chowdhury in Mumbai; Editing by Sonali Paul and Jacqueline Wong

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