The zero is done before the negate.

ie zy is applied before ny as this extract from page 35 says

The zx and nx bits are 0, so the x input is neither zeroed nor negated.

The zy and ny bits are 1, so the y input is **first
**

zeroed, and then negated bit-wise.

Also if you look at the truth table for the ALU in figure 2.6 (page 37) and at look at the output for the various inputs

you can see that the zeroing must come first