When you assign Favourite to a highlighted weapon in your inventory, if there are more than 1 of that weapon (Steel Sword (2)) you cannot use the weapon on a hotkey in game.
Solution at the moment is just to drop or sell one of them.
Try any weapon you have 2 or more of, favourite it, also favourite another weapon (so say a sword and a bow, one of which you have 2 or more of), go out of your inventory back to the game, press C
Now a little favourites menu pops up, highlight one of them and press number 1
Highlight the other and press number 2
Press tab to go back to the game ... Now if you press the 1 or 2 keys you have hotkeyed for those weapons you should switch between them - But it does not work if one of the weapons you have hotkeyed has more than just one of that same item in your inventory. It does if you only have one of that item.
