this seems to be related - I noticed that outputs of pkg install are also not captured by diary

the following output:

octave:4> diary on
octave:5> pkg install -verbose parallel-3.1.3.tar.gz
mkdir (c:\Programs\Octave\Temp\oct-YQjsJD)
untar (parallel-3.1.3.tar.gz, c:\Programs\Octave\Temp\oct-YQjsJD)
configure: loading site script /usr/local/etc/config.site
checking for a BSD-compatible install... /usr/bin/install -c
checking whether build environment is sane... yes
checking for a thread-safe mkdir -p... /usr/bin/mkdir -p
checking for gawk... gawk
checking whether make sets $(MAKE)... yes
checking whether make supports nested variables... yes
checking for mkoctfile... C:/Programs/Octave/OCTAVE~1.0-W/mingw64/bin/mkoctfile-5.1.0.exe --verbose
checking for octave-config... C:/Programs/Octave/OCTAVE~1.0-W/mingw64/bin/octave-config-5.1.0.exe
checking for a sed that does not truncate output... /usr/bin/sed
checking whether the C++ compiler works... yes
checking for C++ compiler default output file name... a.exe
checking for suffix of executables... .exe
checking whether we are cross compiling... no
checking for suffix of object files... o
checking whether we are using the GNU C++ compiler... yes
checking whether g++ accepts -g... yes
checking for g++ option to enable C++11 features... none needed
checking for style of include used by make... GNU

<snip>

make[1]: Leaving directory '/c/Programs/Octave/Temp/oct-YQjsJD/parallel-3.1.3/src/gl'
true # without any recipe, make seemingly doesn't always consider the target to be really re-made after this rule was triggered
cc -c gnulib-wrappers.c -Igl -g -O2 -fPIC
make: cc: Command not found
make: *** [Makefile:163: gnulib-wrappers.o] Error 127
make: Leaving directory '/c/Programs/Octave/Temp/oct-YQjsJD/parallel-3.1.3/src'

pkg: error running `make' for the parallel package.
error: called from
    configure_make at line 99 column 9
    install at line 184 column 7
    pkg at line 441 column 9
octave:5> diary off
octave:6>

is reduced in diary to:

octave:5> pkg install -verbose parallel-3.1.3.tar.gz
mkdir (c:\Programs\Octave\Temp\oct-YQjsJD)
untar (parallel-3.1.3.tar.gz, c:\Programs\Octave\Temp\oct-YQjsJD)

error: called from
    install at line 192 column 5
    pkg at line 441 column 9
pkg: error running `make' for the parallel package.
error: called from
    configure_make at line 99 column 9
    install at line 184 column 7
    pkg at line 441 column 9
octave:5> diary off

A small observation using "diary" and "system" in the following context:

diary somefile.txt
system ("ls -la")
diary off

The resulting file "somefile.txt" contains:

octave:2> system ("ls -la")
ans = 0
octave:3> diary off

In Matlab R2018b you can see the actual file listing as shown inside Octave.