It seems that the SSO module can report as active even if Jetpack itself is not connected. In that case, SSO doesn't work and local logins are also disabled. Disabling force SSO if Jetpack is not connected should fix it.
Check jetpack is active
It's possible for the SSO module to be active without Jetpack being connected. In that case, we would be blocking local logins even though SSO is not available.
Check jetpack is active (#16)