In response to Cons #2, I was thinking that if the currently selected option was highlighted green it would be easy to tell what's selected. Then for the mouse hover for selecting options, the current method of enlarging the pie wedge and adding text seems clear enough to me. Also, assuming you made a blunt weapon, then put just one ingot on the anvil, the Z menu should have no green highlight when you pull it up (no current selection). I was going to recommend defaulting to blades, but that won't make sense once 1 ingot shields are implemented too.
As a side thought, maybe instead of just indicating current selection inside the Z menu, there could be text or something in the corner of the screen or hovering over the anvil that tells you what your current hammering will result in.