Preheat oven to 350ºF.
In a medium bowl, combine flour, baking powder, baking soda and nutmeg; set aside.
Place butter and cheese in a large bowl; cream using an electric mixer. Add sugar and beat until batter is pale yellow; beat in vanilla extract and egg.
Add about 1/3 of flour mixture and 1/3 of milk to cheese mixture; mix batter on low speed until just combined. Repeat 2 more times with remaining flour mixture and milk, until thoroughly combined into cheese mixture.
Shape dough into a ball and loosely cover with plastic wrap. Using your palms, press down on plastic wrap to flatten dough into a hamburger shape; refrigerate for at least 30 minutes and up to 2 days.
Sprinkle a teaspoon of flour on a flat work surface. Pull off about 1/3 of dough and, using a rolling pin, roll out dough to 1/8-inch thickness. Using a 3-inch circular cookie cutter, cut cookies out of dough and place on ungreased baking sheets. Roll up dough scraps and add back to dough ball. Pull off another 1/3 of dough and repeat process until all dough is used — recipe will make approximately 45 cookies.
Sprinkle cookies with colored sugar and bake until edges just start to turn golden, about 10 to 12 minutes. Remove cookies to wire racks and cool completely. Yields 1 cookie per serving.