Two hosts on the same segment both fall back to link-local addressing. What can they do?
Answer
Reach each other on that segment, and nothing beyond it
Link-local addressing is a working address scheme with no routing attached. Hosts on one segment can talk to each other, which is exactly what it exists for, and there is no gateway so nothing off the segment is reachable. Saying it carries no traffic understates it. The gateway option describes something that does not happen automatically and would not help anyway, since the upstream network knows nothing about 169.254.0.0/16. A static route needs a next hop that can actually forward the traffic, and neither host has one.