1. Grease an 8-inch square baking dish (or another 1 1/2-quart to 2-quart baking dish) and spread the cubed challah in the bottom.
2. Heat 1 tablespoon of the olive oil in a skillet over medium to low heat. Add the onions, salt, and sugar. Sauté until they are lightly caramelized (a medium golden-brown color), about 15 minutes.
3. Meanwhile, in another heavy skillet, heat the other tablespoon of olive oil over medium heat and sauté the pancetta until the fat is almost all rendered and it begins to get crisp, about 8 to 10 minutes. Set on a paper towel to drain.
4. Whisk together the eggs, milk, dry mustard, nutmeg, and thyme. Season with about 1/4 teaspoon of salt and a generous quantity of black pepper.
5. Spread the pancetta over the bread cubes, then layer the onions on top. Sprinkle grated Gruyère on next, and then pour the egg mixture over the entire thing.
6. Press down on the top gently, so that all of the bread cubes get soaked a bit with the egg mixture. Cover and refrigerate overnight.
7. In the morning, take the casserole out of the fridge so it can warm on the counter, and preheat the oven to 350°F. Bake, uncovered, for 35 to 50 minutes, or until the edges are bubbling and the top begins to brown. The baking time will be greatly dependent on the depth of dish you use. Check the interior with a knife; if it comes out clean the bread custard is baked through. (Cover with foil near the end of cooking if the top is already browned.)
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