Re: Your steps in AquaMail are different than mine.
Yes I see now.
All *we* do is fire off a web page on Microsoft's web site to log you in in a window - and wait for that to complete.
The actual steps (my having been prompted to confirm with an SMS code, and your not getting prompted) are managed by Microsoft. I have no way to know why you're not getting the SMS step even though you're using "2 factor".
I hope MS support can work that out (but most likely they'll just recommend you use Outlook...)
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Other than that - the login error is well a login error, but with the "steps being different" (above), it's not surprising.
The outgoing server is a "cannot connect" / network error, I know you don't want to hear that, but that's what it is, it doesn't even get to the step of logging in.
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As I wrote above, another option is to use "Internet Mail" account type + enter the "application specific password" (which I hope is what MS provided for you, what you wrote originally) or to generate one yourself here:
https://support.microsoft.com/en-us/help/12409