It is, that was one of the first things I thought of too. If I swap the rectangle and circle (Engrave the circle and cut the rectangle around it, it indeed cuts the inner rectangle. and if I turn off the red layer its okay also.
Click Edit > Select open shapes. Does it select anything? If it doesn’t, email the file to developer at lightburnsoftware dot com and I’ll have a look. I’d like to see why it’s happening.
It does its best to figure this out, even with open shapes - If you have something that’s a single loop, really close to being closed, it generally works correctly. If you have something like a circle that’s cut in half, and the two halves aren’t connected, then it doesn’t do as well. Your best bet in these cases is to use the auto-join tool (Tools > Auto Join) or manually connect / close the shapes using the node editing tools.