Why is iCloud auto downloading files

Since it is a syncing service, the files with iCloud Drive work exactly like they do with iCloud Photos. Those will also be stored on your device and when space is needed, they will be offloaded to make room when using Optimized Storage. You cannot store a photo in iCloud only and optimization happens automatically when space is needed.

You have Optimized Storage turned off, so no files will be offloaded when space is needed. For those with a lot of photos or files in iCloud Drive a 2TB plan may be needed to make those files/photos available on other devices. Again, they will automatically be offloaded on your Mac, only when needed by the OS for storage space, if you have Optimized Storage turned ON.

If you are looking for a service described as: "All I want is to be able to store and upload stuff in iCloud and download it when I need it", then iCloud is not the service for you. That would be something more like DropBox, which is not the same thing.

As you can see in the Setting for Optimize Mac Storage:

The full contents of iCloud Drive will be stored on this Mac, if you have enough space. Older documents will be stored only in iCloud when space is needed.

With Optimize Storage turned off the files will not be removed from your device when space is needed. If you turn it on, then when space is needed, older documents will be offloaded from your device. Space is not needed on your Mac, so like it says the full contents will be stored on the Mac.

iCloud is a syncing service to make the same data available on all devices, it is not an external storage solution that you can choose to store data independent of the device. On the Mac, it will also be stored locally and when Optimize Storage is turned ON, then files will automatically be removed from the device when storage space is needed. It starts with the oldest files first when it comes to offloading those files from the Mac. You currently have it turned OFF, which means no files will be offloaded from the Mac when space is needed.

Ecto1 wrote:

I spoke to Apple support and they said it is unexpected behavior and are looking into it.

It is documented by Apple that your iCloud files are going to be stored on your Mac unless you use Optimized Storage where they will be removed only when space is needed.

Your Mac can automatically store documents in iCloud when more space is needed. If space is not needed, the full contents of iCloud Drive remain on your Mac.

Store files in iCloud Drive on Mac - Apple Support

I can also show you on my Mac when going to  > System Settings > General > Storage > iCloud Drive (i). Space is not needed on my Mac so all files are stored on my Mac.

You do have the option to manually Remove Download on any file in iCloud by Control-Clicking on the file. You will then see a cloud icon next to the file to download again on demand. From your description, you want to be able to store documents at iCloud Drive where they are not going to take up space on your Mac and that is not something iCloud is going to do unless you follow up by removing the download after it has been saved to iCloud Drive, or if space on your Mac is currently constrained.

Also if you save a file in iCloud/Files on your iPhone/iPad, it will automatically be downloaded on your Mac. You can check that out yourself rather easily. That is the distinction of iCloud as a syncing service.

Please update what Apple determines from your Support call that would indicate any different behavior.

Ecto1 wrote:

by turning optimize Mac storage off, …

I have turned off the option to store the iCloud files on the Mac,

These are exactly opposite things. The opposite of "Optimize" is "Download all"

Perhaps you don't fully understand iCloud. You can see this:

Understanding iCloud Drive - Apple Community

but it says pretty much what Mac Jim ID said.

Sorry, I was going off of the this information in your post: "All I want is to be able to store and upload stuff in iCloud and download it when I need it". That is not going to be iCloud. On your Mac, those files are going to be stored locally as well if you have space, unless you manually offload a file. If you save a file in iCloud on your iPhone/iPad, that file will also be downloaded to your Mac and stored there. With Optimized Storage turned on, the iCloud files stored on your Mac will automatically be offloaded, starting with the oldest files, whenever space is needed for any other purpose.

If Apple found unusual behavior with an install, then follow up with them and certainly share any additional information that they were able to provide to you.