What I read that scene as is: Hermes slipped into Recursion, the kind P was talking about during Hinterlands. I don't know if he was trying to leverage the power of his own myth for whatever "undo the labyrinth" scheme he's working on, or if he just didn't notice and putting literal Hermes in the position of killing someone in the role of Argos to release someone in the role of Io was just too close to his story, but either way I think the story took over. Which is why he couldn't remember where he was, why he was calling people by the names of people from the story, and why when someone who was a better fit for the role of Argos showed up, he switched to trying to kill them without noticing.
That's my interpretation, anyway.