Two KM macros, each activated with a Hot Key, both only available in the same app.
Macro 1: Brings up a palette, a palette that's configured using Show The Palette For One Action
Macro 2: Nothing to do with Macro 1 and instead selects a menu item
If Macro 1 is activated—the palette is now on screen—I would expect Hot Key activation of Macro 2 to cancel Macro 1. That's not the case and the palette remains present. But if I press some key which has no association with a KM Macro, like the Space Bar, then the palette goes away.
In this setup, shouldn't Hot Key activation of Macro 2 cancel the palette of Macro 1?
No, macro triggering, in and of itself, will not cancel a palette.
Typing a key will, changing applications, will, but a macro triggering will not.
A long, long, long time ago it did. But since macros can be triggered in the background (eg periodically triggered macros) and do background things, macro triggering itself does not count as an action.