In a small saucepan, stir the milk, granulated sugar and butter over medium heat until the butter is nearly melted and the temperature registers 110 degrees to 115 degrees on an instant-read thermometer, 2 to 3 minutes. Remove from the heat, stir in the yeast and let stand for 10 minutes (the mixture will look lumpy).
In a large bowl, whisk the flour, zest, salt and nutmeg. Make a well in the center, add 2 of the eggs and whisk gently in the well. Whisk the yeast-milk mixture into the eggs. Using a wooden spoon, stir mixture until a dough forms.
On a lightly floured surface, knead the dough, dusting with flour as needed, until smooth, about 7 minutes. Transfer to a large greased bowl, cover with plastic and let rise in a warm place until doubled in size, about 2 hours.
Grease an 11-by-17-inch baking sheet. Grease the outside of a 4-cup souffle dish; place in the center of the baking sheet.
Using a mixer, beat the remaining egg and the cream cheese at medium speed until smooth. Add 1 cup confectioners' sugar and 1 tsp. vanilla; mix at low speed until blended, then beat at high speed for 1 minute. Stir in the pecans, if using.
Place the dough on the work surface, dust with flour and form into a 2-foot-long log. Using a rolling pin, roll the log into a 6-inch-by-30-inch strip. Spoon the cream cheese mixture down the center of the dough, stopping 1 inch from each short end. Nestle the baby in the filling. Bring the long edges together and seal, enclosing the filling as best you can. Transfer the roll to the prepared sheet, placing it seam side down and bending it around the souffle dish. Cover with a kitchen towel and let rise in a warm place until doubled in size, 1 to 1 1/2 hours.
Position a rack in the lower third of the oven and preheat to 350 degrees . Add 1 inch hot water to the souffle dish. Bake for 15 minutes, then tent with foil and continue baking until golden-brown, 15 to 20 minutes more. Let the cake cool on the sheet on a rack. Transfer cake to a large platter.
In a bowl, using a fork, stir the remaining 2 cups confectioners' sugar, 1 tsp. vanilla and 2 to 3 tbsp. milk to make a thick icing. Drizzle over the cake. Sprinkle with sanding sugar, if using.