Bank stocks sizzled with a vengeance Tuesday, after enduring a four-day slump. A major bond market rally sparked by surprisingly favorable inflation news carried many bank issues into record high territories.

May retail sales rose only 0.2% from April, the Commerce Department reported, falling far short of economists' 0.8% consensus estimate.

Separately, the Labor Department reported that the consumer price index rose by 0.3% in May, in line with expectations.

Banks, which usually move in lockstep with the bond market, enjoyed a robust day. The Standard & Poor's index of bank stocks rose 2.33%, compared with a .97% increase in the S&P 500 index. Only one of the top 50 banks, Bank of New York Co., lost ground.

The gains follow a week in which bank stocks fell more than 5% on profit taking and uncertainty over the direction of interest rates.

Uncertainty gave way to optimism on Tuesday, however. Thirty-year Treasury bonds rose more than a point in early trading, and had risen 64 basis points by late afternoon, with the yield down to 6.62%.

Bond investors appeared convinced inflation was at bay, and that the weak economic data would persuade the Federal Reserve to cut interest rates.

Money-center stocks did particularly well. Citicorp rose $2.875 to $55.875, J.P. Morgan & Co. rose 75 cents to $71.125, Chase Manhattan Corp. rose $1.50 to $46.625, First Chicago Corp. rose $1.125 to $58, and Chemical Banking Corp. rose $1.375 to $46.125.

"Bonds are rallying again, so bank stocks are rallying again," said Diane Glossman, a money-center analyst with Salomon Brothers Inc.

However, Ms. Glossman said she does not expect bank stocks to continue their remarkable rally. So far this year, banking shares have risen by more than 20%, compared with a 15.3% rise in the S&P index.

In fact, Ms. Glossman expects bank stocks to decline roughly 10% during the second half as the economy slows and investors take profits.

A positive outlook for dividend growth and low credit losses will limit the downside, she added.

Citicorp continues to stand out in trading, with the money-center's shares hitting yet another 52-week high on Tuesday.

Morgan Stanley & Co. raised its 1996 earnings estimate on Citicorp by 2%, to $7.50 a share, based on what analyst Art Soter predicted would be a larger-than-expected stock buyback. Mr. Soter also raised the bank's 1997 earnings-per-share estimate by 7%, to $8.75.

The First Call Corp. consensus earnings estimate among analysts who follow Citicorp is $6.98 a share for 1996. First Call does not provide a figure for 1997.

David Sloan, a fund manager with Sife Trust Fund in Walnut Creek, Calif., predicted Citicorp's stock buyback announcement could come after earnings are announced in July.

Ms. Glossman noted that many of Citicorp's preferred equity redemption cumulative shares, or Percs, were being redeemed Tuesday, leading to heavy trading. Volume topped 4.07 million shares, compared with average daily volume of 1.9 million.

The retail sales and CPI reports came on the heels of Federal Reserve Chairman Alan Greenspan's comments in Europe earlier this week that there may be a mild U.S. recession.

This would lend credence to the theory that the Fed may cut interest rates either in July or by the third quarter, said Mr. Sloan. Also, he said, "banks have been oversold in the last four days, so it was time for a rally."

While money-center stocks and top regional banks outperformed the market, smaller banks did not fare as well. The Nasdaq index of banks rose only 0.62%, essentially in tandem with the stock market.

But thrifts rallied with the bond market. Great Western Financial Corp. rose 62.5 cents to $20.875, H.F. Ahmanson & Co. rose $1 to $22.625, Golden West Financial Corp. rose $1.625 to $47.625, and Washington Mutual Savings Bank rose $1.25 to $23.875.

Credit card companies also enjoyed the bond market rally. MBNA rose $2 to $33.75, First USA Corp. rose $1.75 to $48.25, and Capital One Corp. rose 62.5 cents to $21.25.

Mellon Bank Corp. stock rose 87.5 cents to 43.125. On Monday, Mellon said it had acquired 3.75 million of its common shares and 4.5 million of its warrants from a unit of American Express Co.

Mellon said it paid $213 million for the shares. The purchase is part of the bank's 1993 acquisition of the Boston Co., which Mellon bought from American Express.

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